How ETF Assets React To Bear Markets

The S&P 500 briefly dropped 20% off its recent peak on Friday, marking a bear market after what’s been a grisly and volatile 2022 for stocks. But a look at the short history of ETFs in bear markets produces a mixed picture of what that will mean for the asset base underpinning the industry. analyzed historical assets under management data from FactSet to see how ETF assets reacted to bear markets since the inception of the SPDR S&P 500 ETF Trust (SPY) in January 1993. 

September 2000: The Dot-Com Bubble 

The first peak-to-trough drop of more than 20% since the first U.S.-listed ETF carries a close similarity to 2022’s bear market: A run of high-flying technology stocks abruptly ended after the Federal Reserve began hiking interest rates. 

The dot-com bubble saw the S&P 500 drop from 1527 points in late March 2020 to 776 points in September 2002, a 49% fall. 

U.S.-listed ETFs added approximately $68.9 billion in assets during the period where broad index funds made up the ETF market. Just 36 ETFs were trading at the beginning of the bubble, made up mostly of State Street’s sector ETF suite and iShares’ foreign equity funds. 

Of that group, 15 had a net gain in assets during the bear market. SPY dominated flows in the fledgling asset class with just shy of $23 billion in inflows, followed by the Invesco QQQ Trust (QQQ) adding $6.6 billion. Unsurprisingly, the biggest loser among ETFs in that period was the Technology Select Sector SPDR Fund (XLK), with a loss of $574.5 million in assets. 

A total of 72 ETFs would launch during the bear market, as BlackRock Inc. and State Street Corp. expanded their index offerings. Vanguard Group Inc. also made its debut, with two ETFs, most notably the Vanguard Total Stock Market ETF (VTI)

October 2007: The Great Financial Crisis 

The burst of the subprime loan-backed U.S. housing bubble and its knock-on effects through the financial sector generated a nearly 57% loss in the S&P 500 Index between Oct. 9, 2007 and March 9, 2009. 

The industry would lose $142 billion in assets among funds that were trading at the beginning of the crisis to when the bear market ended. The  iShares MSCI EAFE ETF (EFA) took the largest asset loss during the period, with a $28.3 billion outflow, followed by SPY’s $25.8 billion loss. 

Only three funds managed to add more than $5 billion in the crisis, with the SPDR Gold Trust (GLD) adding $17.2 billion, the iShares TIPS Bond ETF (TIP) adding $5.8 billion and the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) adding $5.4 billion. 

A total of 640 ETFs would debut during this bear market. 

February 2020: The COVID-19 Crash 

The shortest S&P 500 bear market on record came as the U.S. and other major economies seized as COVID-19 forced large-scale shutdowns of in-person activity. 

Investors pulled $1.2 trillion in assets under management from Feb. 19, 2020 to March 23, 2020, amounting to a 28% drawdown. 

However, central banks cut their interest rates to near zero and took trillions of dollars’ worth of assets onto their balance sheets to keep economies stimulated, leading to a…

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