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Investors flocked to equal-weight ETFs last quarter as market volatility persisted, while TIPS ETFs saw the largest outflows as investors tweaked portfolios in anticipation of economic weakness and falling inflation.
Equal-weight ETFs featured in the highest-ranking ETFs by inflows in Q3, suggesting investors are sharpening their focus on potential concentration risks across mainstream benchmarks.
The Xtrackers S&P 500 Equal Weight UCITS ETF (XDEW) pulled in $2.3 billion across the quarter, while the iShares S&P 500 Equal Weight UCITS ETF (ISPE) saw $1.6 billion inflows across the same period.
This comes against a backdrop of the so-called Magnificent Seven large cap names now comprising 35% of the S&P 500 index, with investors increasingly concerned about the ability of these tech-focused names to continue beating earnings as they have done since early 2023.
The diversification benefits of equally weighted ETFs are also becoming increasingly attractive as uncertainty surrounding the upcoming US elections weighs heavy on investors’ minds, alongside geopolitical tensions continuing to heighten.
Equal-weight ETFs in Q3
Outside of U.S.-centric equity allocations, investors added to their core global positions in Q3, with the iShares Core MSCI World UCITS ETF (SWDA) seeing the most inflows of the quarter at $3.3 billion, while the Vanguard FTSE All-World UCITS ETF (VWRL) saw $2 billion of inflows.
Concurrently, U.S. equity exposures remain in the top ranks, with BlackRock’s, Invesco’s and State Steet Global Advisors (SSGA) S&P 500 ETFs all featuring in the top 10 spots.
US equities remain attractive in light of better-than-expected earnings from the top names in tech. A report from BlackRock found Q2 earnings growth for the tech sector was at 20% versus 5% for non-tech sectors---surpassing expectations of 18% and 2% at the start of the earnings season.
Shorter duration bond ETFs, like the iShares $ Treasury Bond 0-1YR UCITS ETF (IB01), also enjoyed handsome inflows as investor concerns grew that an economic downturn could lead to a selloff in equity and credit markets.
TIPS Suffer Shift in Investor Preference
As inflation expectations have dropped, TIPS have become less attractive compared to nominal bonds, which currently offer higher yields.
This, combined with the lower duration risk of short-dated government bonds like IB01, has led to a shift in investor preference, resulting in outflows of $745m from the iShares $ TIPS UCITS ETF (ITPS) across the quarter.
The Amundi US TIPS Government Inflation-Linked Bond UCITS ETF (TIPU) also followed suit, with $245 milion outflows across the same period.