Fund flows represent cash activity in and out of ETFs. It reveals information about where investment capital is being committed. A fund flow is a gauge for investors’ sentiment. This article explains what fund flow is, and why it is meaningful to understand it.

What are ETF Flows?

The Assets Under Management (AuM) of an ETF represents the total amount of money that is managed by that particular strategy. There are two ways in which an ETF can grow in size:

1. the securities that it holds can increase in value or,
2. new investors can add money to the fund.

ETF flows refer to the latter process – they are the sum of all cash inflows and outflows into and out of ETFs. It is usually calculated and measured monthly or quarterly.

For example, if one investor sells CAD$1 million shares of the ETF and another investor buys CAD$3 million shares, the net flows would be CAD$2 million over the given period.

ETF Flow signals

Flow data can be useful for investors at it gives an indication of whether other investors are buying or selling a particular ETF and consequently, provide a different view on the overall sentiment of the market. For example, investors pouring money into Canadian Bonds ETFs may indicate a flight to safety and general optimism in Canadian fixed income may suggest lack of confidence in Canadian equities. Caution should be taken in this area as fund flow looks backwards. It helps investors find past investment trends rather than future ones.