It would be an understatement to say BlackRock has been a leader in ESG the last couple of years but the tides could be turning. There have been massive outflows from ESG in the month of May which has been unusual given the asset classes' widespread popularity where they topped $3.5 billion. BlackRock has been the main source of outflows from IShares ESG Aware MSCI EM and other popular funds. BlackRock has cut two of iShares most popular funds from seven of their ten models. This is potentially a huge blow, as it could signal the firms changing stance in ESG or it could just be smoke and mirror as asset allocations normally change. ESGs inclusion in many model portfolios has been key to its growing popularity.

Finsum: Are ESG investors really so skittish with the tightening in the economy; the long-term prospects for ESG still seem overwhelming. 

Actively managed exchange-traded funds are seeing an influx of interest as investors are concerned about the escalating market volatility. Active funds are touting their advantages of weathering volatility by making better day-to-day shifts at the portfolio level. One advantage active portfolio managers have is selecting areas where they can have an edge or avoiding places with the most volatility. For instance, tech stocks are down nearly 30% depending on which index you may be looking at. Volatility is expected to continue for the near term as the Fed is projecting another 75 bps hike in the upcoming meeting and a recession is hoving over the economy like a black cloud.

Finsum: Passive ETFs may be contributing to excess volatility according to breaking financial research; it makes sense investors would turn to active funds.

April and May were a tough couple of months for mutual funds and ETFs as they were the first consecutive months of outflows since 2018. According to fund research firm Morningstar, investors pulled $39 billion out of funds and ETFs in May, following $93 billion in withdrawals in April. May was also the first month in three years that ESG-focused mutual funds and ETFs saw any outflows. Investors pulled a net $3.5 billion in ESG strategies during the month, a first since January 2019. The course change comes after ESG funds saw a record $69 billion in new money in 2021. The outflows are mainly attributed to current market conditions. The ESG investing trend is likely still in fashion and flows are expected to turn around once the market reverses course.

Finsum: ESG funds see the first month of outflows in three years as part of a broader trend in fund outflows due to current market conditions.

In anticipation of last week’s interest rate increase, a spike in yields led to a record $58 billion traded in bond ETFs, according to ETF research firm VettaFi. The bulk of this trading was in the secondary market between stock sellers and purchasers. This was especially true in high-yield corporate bond ETFs. This is due to high-yield bonds typically being less sensitive to interest rates compared with Treasuries. While high-yield bonds carry higher credit risk, investors are seeking the greater return potential. The highest traded ETF was the iShares iBoxx High Yield Corporate Bond ETF (HYG), which saw $9 billion in trades. This increase in trading in fixed income ETFs has been at the expense of fixed income mutual funds, which are seeing strong outflows. In the current market environment, where many assets are down, high-fee mutual funds are seen as less attractive than low-cost ETFs. 

Finsum: Ahead of last week’s Fed announcement, a spike in yields resulted in a record trade in high yield bond ETFs at the expense of fixed income mutual funds.

Last week, the Federal Reserve raised interest rates by 75 basis points, the largest increase since 1994. The Fed is taking an aggressive approach to combat rising inflation triggered by pandemic-related supply chain constraints and the war in Ukraine. Consumer prices rose in May at the fastest pace in over 40 years. With more rate increases expected, investors and advisors alike have reason to be concerned about both stock and bond returns in the near term. Bond prices fall as rates go up. In response to that uncertainty, advisors could consider an active bond strategy that adapts to changing interest rates and credit spreads. One way to do that is through a short-term variable income strategy. This can be achieved through the FlexShares Ready Access Variable Income Fund (RAVI), a short-term actively managed ETF. The managers of the fund attempt to identify the highest return potential securities based on macro analysis, credit research, and risk management.

Finsum: In response to persistently high inflation, the Fed is aggressively raising interest rates, which is why advisors should consider a short-term active bond strategy to navigate the current market.