S&P 500 trackers hit a record 27% of 2023 equity ETF flows

Wall Street’s blue-chip S&P 500 index captured its highest share of global equity exchange traded fund flows for at least a decade last year, as the rise of the so-called Magnificent Seven reshaped benchmarks worldwide.

ETFs tracking the S&P 500 vacuumed up a record $137bn in net terms last year, according to data from Vanguard, surpassing the previous peak of $119bn in 2021.

This accounted for a record 27 per cent of all global equity ETF flows, compared with just 9 per cent in 2022, 13 per cent in 2021 and 1 per cent in 2020. The prior peak, in data going back to 2012, was 22 per cent of global flows in 2016.

The inflows means America’s global dominance of global equity markets is now approaching the levels seen in the 1950s and 1960s, when the US led the postwar economic recovery and the Nifty Fifty grouping of Wall Street blue-chip stocks reaped the rewards.

“People see a lot more in the news about the Magnificent Seven stocks. People want a piece of that, and all these stocks are in the S&P,” said Bill Coleman, head of US ETF capital markets at Vanguard, referring to the septet of tech or tech-related stocks that have driven US stock markets to record highs.

Global demand for exposure to the S&P 500 index is also a sign of the increasing dominance of Wall Street in general.

The US equity market accounts for an “astonishing” 60.5 per cent of global stock market capitalisation, according to research by Elroy Dimson of the University of Cambridge and Paul Marsh and Mike Staunton of the London Business School.

This is up from just 28.6 per cent in 1989, when Japan briefly overtook the US as the home of the world’s largest stock market, and is the highest figure since 1973.

“This reflects the superior performance of the US economy, the large volume of IPOs and the substantial returns from US stocks,” Dimson, Marsh and Staunton wrote in the UBS Global Investment Returns Yearbook 2024. “No other market can rival this long-term accomplishment.”

Within the US, Coleman attributed last year’s outsized demand for S&P 500-tracking ETFs to the index’s strong performance.

Aided by the powerful showing of the megacap stocks, the S&P 500 chalked up a gain of 24.2 per cent last year, outshining the 14.4 per cent return of the mid-cap S&P 400 index and the 15.1 per cent of the small-cap Russell 2000.

This outperformance has continued this year as the blue-chip benchmark has hit a series of record highs. US small caps are suffering their worst performance run relative to large companies in more than 20 years.

Coleman saw a positive correlation between flows and the previous month’s index returns, helping funnel money to the strongest performers.

In addition, he said “model portfolios, especially in the ETF space, are becoming more and more important”, to overall flow data.

“We saw more models allocate to the S&P 500 last year,” Coleman said. “They are increasing their equity weighting in expectation of a continued bull market, with the possibility of interest rate cuts.”

A desire to jump on the Magnificent Seven bandwagon might not be perceived as an obvious boon for S&P 500 trackers, though.

The six largest stocks in the index are all M7 members. However, investors could get greater exposure via a Nasdaq 100 ETF, with the M7 accounting for 40 per cent of this index, compared with just 29.1 per cent of the S&P 500. Yet the $258bn Invesco QQQ Trust Series (QQQ), by far the largest and most liquid Nasdaq-tracking vehicle, attracted just $7.2bn last year, according to VettaFi data, far less than in 2020 or 2021.

“QQQ is a more concentrated way to get exposure. It’s not weighed down by JPMorgan, Berkshire Hathaway and more value-oriented companies,” Todd Rosenbluth, head of research at VettaFi, said.

Coleman squared the circle by arguing “there is appreciation for the diversification here. You are also getting exposure to another 493 companies [in the S&P 500] that make up more than 70 per cent of the index by weight.”

Flows into S&P 500 ETFs were boosted by a technical factor last year when the $533bn SPDR S&P 500 ETF Trust (SPY) pulled in $31bn in two days in December. The bonanza included the highest single-day haul on record for any ETF of $20.8bn on December 18, according to VettaFi’s data, shortly before the expiry of a major futures contract.

“Futures were trading rich relative to what the stocks were,” said Coleman. “A lot of people who would normally roll their futures put [their money] into SPY instead”, with the highly liquid SPDR ETF commonly “used for short-term tactical trading to hedge short-term tactical positioning”.

However, even without these anomalous inflows, the S&P 500’s share of global equity ETF flows last year would still have been the highest since at least 2012.

And while SPY has bled a net $8.7bn so far this year, according to VettaFi, as some temporary inflows have reversed, continued strong demand for the $432bn Vanguard S&P 500 ETF (VOO) and the $33bn SPDR Portfolio S&P 500 ETF (SPLG) means ETFs tracking S&P’s flagship index still accounted for a historically high 20 per cent of global equity ETF buying in the first two months of 2024, according to Vanguard.

Despite the concentrated nature of ETF flows, Rosenbluth saw strong demand for S&P 500 ETFs as a “highly positive sign” for markets at large.

“The S&P 500 index and ETFs that track it is the entry point into the ETF market for many investors. It’s the most well-known and favoured of the US equity benchmarks,” Rosenbluth said.

“So as ETFs further penetrate the American population and culture these ETFs are likely to be the starting point for many people.”