If I were a betting man, I’d bet that “fiscal cliff” was the most frequently used phrase of December 2012. From countdown clocks to special reports, the media covered the approaching fiscal cliff 24 hours a day, seven days a week.

For investors, there was no way to escape the endless speculation as to what hurtling over the fiscal cliff could mean for the stock market, and what possible changes in tax laws could mean for personal investment portfolios.

Well, it’s 2013 and while the fiscal cliff has come, it has not yet fully gone. Congress did agree to a bare bones deal to delay the fiscal cliff. But as my colleague Russ Koesterich has noted, the deal fails to address the longer-term fiscal challenges facing the United States and uncertainty continues to linger over the debt ceiling. Russ expects the deal will damper short-term US consumption, and he is forecasting a modest fiscal drag on the US economy early in the year.

So, how is this political wrangling being reflected in ETF flows?

In December, a month when investors typically position portfolios for year-end and the start of a new year, investors followed a risk-on pattern. Investors favored US large cap and emerging market equity exchange traded products (ETPs), while withdrawing funds from US Treasury ETPs. Worries over the fiscal cliff may have influenced high dividend ETPs, which saw redemptions of $0.1bn in December. It was the first monthly outflow for the category in more than two years.

With the political situation still uncertain, Russ has told investors to prepare for a rocky road over the next three months. By the end of March, Congress must contend with the debt ceiling, confront an estimated $108 billion in spending cuts and pass additional legislation to fund various government entities. What might this mean for ETF flows in the early part of this year?

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.