What are ETF fund flows, and why do they matter?

What is an ETF?

An exchange-traded fund (ETF) is an investment vehicle that represents a specific asset class or index.

Getting into stock trading, or any type of investment, can feel overwhelming. Picking the right investment takes a lot of time and research — and even then, things can go wrong. The process isn’t unlike gambling — betting money on outcomes you have little influence over.

Exchange-traded funds (ETFs) simplify this process by offering pre-assembled bundles of investments curated by professionals. However, investing in ETFs doesn’t mean you directly own the underlying assets.

Instead, ETFs track the price movements of the assets they represent. This structure reduces the need for extensive research, making them more accessible for beginners. 

For instance, an ETF tracking the S&P 500 mirrors its price performance. You can potentially benefit from its price changes without directly investing in all the companies it includes. Even better, ETF shares can be bought and sold on regular stock exchanges, just like individual stocks.

However, buying ETFs typically involves management fees, which are paid to the portfolio managers or fund providers who maintain the ETF. These fees cover the costs of assembling, managing and rebalancing the portfolio to ensure it aligns with its objectives, such as tracking a specific index or asset class.

As you can imagine, these funds move a lot of money in and out due to investors buying and selling them. The tracking of that movement is called an ETF flow.

What are ETF fund flows?

ETF flows represent the money going into and out of ETF shares at varying periods of time.

ETF flows refer to the net inflows and outflows of an ETF. Flows are not necessarily representative of how an ETF is performing — they’re instead indicators of investor sentiment. When examining flows, think of them as investors “voting” with their wallets who buy and sell ETF shares for reasons they find important. 

If you’re wondering why ETF fund flows matter, consider this example: If an ETF experiences a few million dollars in outflows, it may seem alarming. However, it’s essential to look at the bigger picture: A few million might be insignificant for an ETF managing billions of dollars.

That said, while flows don’t directly correlate with an ETF’s performance, they can provide valuable insights into investor behavior and market trends.

There are two types of flows: ETF inflows and outflows.

Inflows

An inflow is when an investor buys ETF shares. When an ETF is experiencing significant inflows, you can assume a bullish sentiment toward the ETF.

Outflows

An outflow is when an investor sells their ETF shares. When an ETF shows significant outflows, you can assume investors are not confident, suggesting a bearish sentiment.

For example, if Bitcoin’s (BTC) price is underperforming, one might notice substantial outflows from Bitcoin-focused ETFs like the VanEck Bitcoin Trust, signaling a bearish sentiment.

It’s important to note that flows do not track an ETF’s price. The importance of ETF fund flows is that they track the buying and selling of an ETF’s shares.

What are ETF flows used for?

Understanding ETF fund flows can help you understand public sentiment and make trading predictions.

ETF fund flow insights serve as an essential tool for investors, offering valuable indicators of investor confidence, adoption or lack thereof.

From a fund manager’s perspective, inflows can signal an opportunity to generate additional profits. For instance, when a fund experiences significant inflows, the fund manager may create additional shares to meet growing demand. This process, managed by an authorized participant — typically a large financial institution — ensures the fund can scale. 

Conversely, an authorized participant might sell their shares or consume open shares to balance supply and demand.

You can also judge overall market sentiment through inflows and outflows. Imagine that S&P 500 ETFs are experiencing an outflow while crypto ETFs experience significant inflows. This shift might indicate a lack of trust in the traditional markets or a reaction to breaking news.

Additionally, investors can analyze historical ETF flows during specific conditions, such as a recession, to understand past investor behavior.

How to analyze ETF flows

An ETF flow calculator provides detailed information on specific ETF fund flows.

There are several ways to conduct ETF fund flow analysis, but the quickest way is through an ETF fund flow calculator. 

These calculators allow you to input an ETF ticker and specify a date range, revealing trends such as daily, weekly, monthly or yearly inflows and outflows.

When examining ETF fund flow metrics, you should keep a few things in mind.

• Flows vary: ETF fund flows fluctuate over time, showing periods of both high and low activity.
• Long-term perspective: Short-term changes don’t always reflect overall trends.
• Investor confidence: Significant inflows often signal positive investor sentiment.
• Scale matters: Smaller flows may have less impact on large ETFs.
• Volatility insight: Analyzing trends over time helps manage market fluctuations.

The below chart shows IBIT ETF fund flows from August to December 2024. Flows peaked significantly in November at around $6 billion, while October also saw a sharp rise. August, September and December experienced lower inflows, with December showing a moderate decline to approximately $2 billion. This indicates fluctuating investor sentiment.

In another example, Bitcoin struggled to break $100,000 in early December, causing the price to drop. Despite this, investors poured funds into various Bitcoin ETFs, indicating positive investor sentiment. Increased inflows often act as a precursor to price rebounds, as seen when Bitcoin eventually surpassed the $100,000 mark.

Active vs. passive ETFs: Key differences

Active ETFs are actively managed to outperform the market, while passive ETFs simply track a market index for steady, lower-cost returns.

Alongside comparing ETF fund flow data, one should consider whether an ETF is active or passive.

Active ETF

• Active ETFs are consistently managed by a team of professionals aiming for a financial target. They achieve this target by buying or selling fund shares based on market performance and personal experience.
• An active ETF costs more to invest in, and portfolio managers aren’t nearly as transparent as passive ETF managers.
• Due to their constant management, active ETFs are riskier than passive ETFs, but they’re also more rewarding.

Passive ETF

• Passive ETFs aim to match the price of the index they represent rather than try to outperform it like active ETFs.
• Passive ETF portfolio managers typically mimic the activity of the index they represent, buying, holding and selling the same assets.
• A passive ETF often charges lower fees than active ETFs — their activity is much less demanding.
• Because a passive ETF tracks publicly traded indexes, portfolio managers are much more open about their moves.
• Passive ETFs are much less risky than active ETFs, but this does result in lower returns over time.

Choosing between an active and a passive ETF depends on several factors. Before investing in either one, you should determine your risk tolerance and desired level of involvement.

How to trade using ETF flows

Investors can combine ETF flow information with other trading tools to make educated decisions.

As stated above, ETF flows are a vital tool in a trader’s kit. You can understand an ETF’s fund flow impact can help with comparisons, analysis and the development of various trading strategies.

Comparing flows

You can examine flows in multiple ETF classes to predict what industries are gaining or losing money. If energy-focused ETFs are experiencing significant inflows, investors might follow the trend and invest in them. 

Analyze flows in context with news

ETF flows often align with current events. Positive or negative news about a sector can influence flows. By staying up to date, you can compare flows and predict when to jump in or out of a fund.

If there are a fair number of outflows in the telecom sector, but the news suddenly trends positive, it may be a good time to buy in early. To supplement this trading method, it’s a good idea to invest in ETFs you have a natural interest in.

For example, the introduction of spot Bitcoin ETFs in January 2024, in combination with Bitcoin hitting $100,000 in December, has had quite an impact on Bitcoin inflows and outflows. 

The week ending Dec. 6 saw the iShares Bitcoin Trust ETF receive inflows of $908 million, a significant increase from the previous week’s $781 million. While it’s impossible to know for certain, these inflows are likely partly driven by the United States Securities and Exchange Commission’s progress in advancing the Bitwise Bitcoin ETF listing on the New York Stock Exchange (NYSE).

Combine flows with other trading tools

How ETF fund flows work is not dissimilar from traditional crypto or stock charts. Combining ETF flows with other technical indicators, such as the relative strength index (RSI) or the Elliott Wave Theory, could be a great way to manage your funds. 

Another tool that is growing in popularity is artificial intelligence agents. Traders can use AI agents for financial advice, automate trading or learn advanced strategies, with some even relying on them to replace the professional teams typically associated with active ETFs.

Diversify investments

An ETF fund flow’s significance is its revelation that nearly every asset class has had its ups and downs. This highlights the importance of diversifying holdings — while one asset class may be down, another could be on the rise. Capitalizing on every opportunity is crucial.

This approach can also extend beyond ETF flows. For example, Solana (SOL) experienced positive price action in early December, driven by expectations of a potential SOL ETF approval. Investors could closely monitor the news and adjust their investments accordingly.