In 2023, U.S. stock ETF investors will no longer chase the rise and kill the fall and flock to a s

Generally speaking, investors tend to "go with the flow, chase the rise and kill the fall", that is, when the asset is ***, and sell when the asset is ***. In 2023, investors in U.S. equity ETFs bucked the trend, pumping money into a series of loss-making trades while withdrawing from a range of better-performing assets.

Commenting on this phenomenon, Bank of America ETF strategist Jared Woodard noted that there is a high positive correlation between ETF inflows and returns, but this relationship has broken down in many sectors and thematic sectors in the last year.

Bank of America data showed that long-term U.S. Treasuries lost 4% for the third consecutive year last year. However, net inflows into long-term Treasury ETFs soared to $70 billion, accounting for 69% of these ** initial assets in early 2023.

Regarding this trend change, the analysis points out that investors are reluctant to take too much risk during market turbulence, believing that it is better to obtain the stability of fixed income than to pursue yield.

Specifically, high-yield bonds returned 11%, senior loans returned 10%, and convertible bonds returned 10%. However, in terms of flows, inflows to high-yield bond ETFs remained steady, with senior loan ETFs seeing outflows of US$1 billion (6% of assets under management) and convertible bond ETFs seeing outflows of US$1.5 billion (a quarter of total assets).

Woodard commented on this:

In the Treasury market, we saw considerable losses for the third year in a row, only to recover until the end of the year, and investors were still willing to close their eyes to buy in the face of huge losses.

On the contrary, we saw that some parts of the market had very strong returns last year, but no one cared and even happily sold off.

Last year, Latin America** returned 24%, but inflows into Latin America** ETFs were only $700 million. Woodard believes investors may be skeptical about the sustainability of the region's outperformance, particularly in countries such as Argentina and Chile.

In Asia, currency-hedged Japanese ETFs returned 43% last year, much higher than the 15% of unhedged Japanese ETFs, which were dragged down by the yen's depreciation. However, it was the unhedged** that attracted large sums of money, absorbing $4.9 billion, while the hedged ETF attracted only $800 million.

For this phenomenon, Woodard believes that the reason is that investors are not interested in medium-term adjustments:

At the beginning of 2023, there was a consensus that the US was heading for a recession, so the Fed would soon stop raising interest rates and possibly even start cutting rates before the end of the year, while increasing defaults could lead to losses on riskier bonds.

However, none of this happened, catching people off guard, and some investors may just not be interested in a medium-term correction and just want to get through the last year in peace and wait until the Fed cuts interest rates.

According to Vettafi data, there is a trend towards a shift towards high-quality, safe assets in U.S. Treasury ETFsPart of the reason this flow model exists is that you can make a fairly high yield on an extremely safe investment, and investors believe that it is better to get the stability of a fixed income than to pursue a yield.