“A clock in a thunderstorm.” That’s how Robert Louis Stevenson described those fortunate, unflappable souls who move through life’s ups and downs at their own pace, without getting rattled by the behavior of others.

That picture of equanimity could also be applied to exchange traded funds, which provided a steady hand as markets hit rough seas in the past quarter: mammoth inflows in January, followed by the steepest stock corrections since 2008. Yet no matter which direction markets moved, ETFs allowed U.S. investors to transact in them seamlessly and efficiently. The week of February 5^th, over $1 trillion of ETF shares traded hands with no service disruptions, according to Bloomberg. That’s millions of buyers and sellers meeting on exchange, essentially canceling out each other’s trades.

In other words, prices went down, but the ETF structure functioned beautifully.

And while stock and bond prices generally ended the quarter in negative territory, flows into ETFs continued to tick higher, reaching close to $60 billion in the U.S. and $128 billion globally (Bloomberg). It was a clear demonstration of investors’ faith in the versatility and sheer usefulness of ETFs.

A glass half full, mostly

Drilling down a bit, ETF flow patterns also shed some light on how U.S. investors are thinking about risks and opportunities and positioning their portfolios for the future. Broadly speaking, these moves acknowledge that 2018 will likely be quite different from 2017. They show that investors are still bullish, but they’re also keeping an eye out for potential “thunderstorms,” be they rising rates, inflation or geopolitical risks.

The cautiously optimistic outlook was expressed in four key investment trends in the first quarter:

1. Stock investors are focused on diversification and quality. The quarter saw strong investments in emerging and international developed markets ETFs, as people sought to both broaden their opportunity set and reduce over-concentration in U.S. stocks. At the same time, investors abandoned defensive stocks (think utilities, telecom and other typical high-yielders), which can be sensitive to inflation and rising rates. They turned instead to higher quality, dividend-growth ETFs—companies with sound balance sheets and likely to keep up with inflation.
2. Bonds are a defense game, where shorter and fatter make sense. As rates rise, investors have turned to shorter-maturity bond ETFs, which currently look attractive from a risk/return perspective: potential for a nice jump in yield and a fatter cushion against price declines than longer-term bonds. Flows to TIPS and floating rates ETFs have also increased, as a buffer against inflation.

3. From a factor perspective, investors are firmly risk-on. The flows into smart beta ETFs tilted heavily toward the momentum factor and away from minimum volatility. Given the recent volatility, this trend may seem surprising, but in fact so-called defense sectors have typically fared better during contractionary periods. Sometimes offense is the best defense.
4. ETFs are becoming a long-term vehicle of choice. Broad market ETFs saw net positive flows across asset classes—not just to developed market stocks and bonds, but notably to broad emerging markets stocks, which saw more than $22 billion added in the quarter. The message here is clear: more investors than ever are using ETFs to progress toward their most important goals.

While ETF flows have slowed slightly from the previous year, I believe it is almost certainly a temporary loss of speed, the result of some investors moving to the sidelines as the market cycle turns. Big structural changes—consumer demand for value and control, the rise of fee-based advice, financial regulation—all provide a means for ETFs to continue to grow, bigger and faster than ever, no matter what the weather.

Watch this video to learn how ETFs work.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risks, including possible loss of principal. Shares of iShares ETFs may be bought and sold throughout the day on the exchange through any brokerage account.  Shares are not individually redeemable from the ETF, however, shares may be redeemed directly from an ETF by Authorized Participants, in very large creation/redemption units. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader. The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). ©2018 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners. 484705

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