Blog Are Surging ETF Inflows by Retail Investors a Harbinger of a Toppy US Market?

Posted October 5, 2017 by Erach Desai

For a recently published article in DST’s Product Strategy Compass on the challenges facing active management, we examined the actual data for retail net flows in recent years. And, we specifically looked at the dynamics between active and passive flows.

Distribution Solutions Surging ETF Inflows tableSource: DST Research, Analytics, and Consulting, LLC analysis of Morningstar Direct data.

As shown in the previous table, no great surprises here. In fact, what happened during the fourth quarter of 2016 was that $150.2 billion in assets flowed out of active mutual funds, compared to $66.3 billion in outflows during the third quarter of 2016. And, at first blush, “flowmaggedon”1 appears to have moderated during the first half of 2017.

On a lark and out of curiosity, I decided to look at a few more years and add in a row for total inflows.

What stands out here, as shown in the following expanded table, is quite interesting:

  • 2012–2014: There seems to have been a steady-to-increasing level of overall inflows.
  • 2015–2016: The annual inflows dropped by more than 50%. What happened here?
  • 2017: Based on the pace in the first half, a simplistic projection would be for total inflows to exceed $800 billion – well above the 2012–2014 trend line!

Distribution Solutions Surging ETF Inflows tableSource: DST Research, Analytics, and Consulting, LLC analysis of Morningstar Direct data. 

So, what happened in 2015 and 2016? A simple, yet most likely, explanation is the tsunami of outflows from active mutual funds, which is pretty much captured in the first row of the table. Validating this cursory analysis is the fact that ETF inflows (passive or total) continued on the relative growth trend line from 2012-2014. There might have been other factors: for example, not all funds that were pulled out of active mutual funds went to ETFs (and may have been deployed in alternatives?), and uncertainty about geopolitical events (but that’s always a nice catch-all excuse!).

The very interesting development in 2017 (through June is what I have collected here) is that overall ETF and passive vehicle inflows are nearly at full year 2016 levels. If active fund outflows have possibly moderated (I’m not convinced of that), we will end up with slightly more than $800 billion in retail investment inflows for mutual funds and ETFs in 2017. And, irrespective of active mutual fund flows, overall ETF inflows will likely exceed $475 billion in 2017.

Historically, retail investors have rushed into the markets in the 8th and 9th innings. So, I am left wondering if the herd mentality into ETFs – by retail investors at the behest of their advisors – is the proverbial canary in the coal mine. In other words, is this trend a harbinger of a significant market correction? When, is the $800 billion question!


1First used by Russell Kinnel of Morningstar in an Investment Insight article circa April 2016.



Erach Desai
Sr. Research Analyst
Research, Analytics, and Consulting

categories: active/passive portfolio, asset flow, etf/etfs, fund management

The views expressed in this publication are solely those of the author and do not necessarily reflect the position or policy of DST Systems, Inc. or its affiliates, subsidiaries, joint ventures, officers, directors, or management.




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