Despite the broader equities market posting one of its best-performing first quarters on record, exchange traded funds continue to trade at relatively low volumes, but they are attracting record cash flows.

“We found that volume is closely related to the volatility level. In general, we observed that volume soars around volatility peaks and declines on plunging volatility,” according to a Deutsche Bank research note. “Equity Cash Flows, on the other hand, present an inverse relationship with Volatility. Usually, inflows are experienced during declining volatility, while outflows are more common during rising volatility.”

Over the first quarter, ETP net cash flows experienced their highest on record, with all ETPs attracting $52 billion, up 101% year-over-year, equity ETPs adding $31.6 billion, up 90% year-over-year, and fixed-income ETPs bringing in $17.1 billion, up 126% year-over-year. [ETF Performance Report: Best First Quarter in Over a Decade]

In contrast, volume in all ETPs has dropped 13% year-over-year for the first quarter. Deutsche Bank argues that “current low volume is driven by low volatility, not by lack of investors’ interest.” Volatility averaged 18.2% in the first quarter, or below the daily average of 27.7% in the last 45 months. Volume is also seen to be highly correlated with the change in monthly volatility peaks.

“Volume is driven mostly by market sentiment or expectations (e.g. fear), while cash flows are driven mostly by fundamentals (e.g. positive surprises in economic or company earnings data),” Deutsche Bank added.

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