ETF Investors Jump Back into the Market
- ETFs took in $69 billion in June — their most in eight months and first time all year with above average inflows.
- US exposures, driven by large-cap flows, led geographies with $40 billion. Developed ex-US funds’ $9 billion added to their record streak of 36 months in a row with inflows.
- Bonds’ $18 billion of inflows in June was led by rate-sensitive markets. Yet, credit sensitive sectors added $3 billion, supported by the best-ever month for convertible exposures ($624 million).
Summertime evokes many nostalgic sounds. One is the sound of feet hitting a wooden dock, louder and louder, quicker and quicker, followed by a primal yell of “Cannonball!” Then a large splash, as joyous kids jump carefree into the water.
Kids are not the only ones jumping in as the summer starts. Despite gains prior to June, investors had shown restraint, illustrated by narrow market leadership and light positioning. In June, investors pushed that restraint aside and jumped back into the market — expressing courage instead of caution.
Global equities posted a 5.6% return, US small caps notched an 8% gain, and an equal weighted version of the S&P 500 Index outperformed the market cap weighted one for the first time in five months.1 The strong small cap and equal weighted S&P 500 returns indicate a broadening of leadership and more boats rising with the market’s tide.
Flows followed the outsized returns, as ETF fund flow positioning started to make some waves.
ETF Flows Start Summer with a Splash
June flows reveal how cautious investors, like a kid sitting on the edge of the dock watching friends play Marco Polo, finally took the leap and jumped into the market’s “rally fun” with both feet. It wasn’t a perfectly executed cannonball, but it did make a splash.
Total ETF inflows were $69 billion in June. While only the 14th best all-time, this was the strongest month of inflows since October 2022. It was also the first time all year that a month had above average flows, as shown in the chart below.
The strong June flows also pushed full-year totals to $220 billion, giving 2023 a puncher’s chance at breaking $500 billion in calendar year inflows for the fourth straight year. But only if averages hold.
Over the past five years, third quarter flows averaged $112 billion while fourth quarter flows averaged $178 billion. Prorating those totals (+$290 billion) alongside the current year-to-date figure, leads to a potential $510 billion of full-year flows in 2023.
Equity funds took in $53 billion to lead all asset classes. Yet, bonds’ $18 billion was greater when viewed related to their asset base. Bond fund flows were 1.3% of their start-of-month assets compared to 1% for equities.
Bond inflows also pushed 2023 totals to over $100 billion, setting up a real probability that full-year flows could surpass $200 billion — a feat achieved in two out of the past three years.
Asset Class Flows
| In Millions ($) | June | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
|---|---|---|---|---|---|
| Equity | 53,360 | 124,577 | 94,167 | 316,218 | 2.47 |
| Fixed Income | 18,410 | 100,967 | 50,506 | 228,445 | 7.77 |
| Commodity | -2,544 | 74 | -1,043 | -18,421 | 0.06 |
| Specialty | -506 | -784 | -377 | -154 | -15.57 |
| Mixed Allocation | 114 | -2,036 | -107 | -985 | -10.54 |
| Alternative | 92 | 219 | 122 | 1,545 | 3.80 |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of June 30, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.
June ETF Flows: A Party in the USA
US-focused exposures’ $40 billion represented the majority of the geographical flows last month. Their June flows also represent 54% of their own year-to-date figures, a stark illustration of how strong investors’ jump into the market's rally was in June.
When viewed based on market cap segmentation, all US segments (large, mid, small, value, and growth) all had inflows in June, and are now all in net inflows year to date. And small caps had their highest inflows since November 2021, as investors sought to express a risk-on view, as well as a contrarian view on the current narrow market leadership.
Developed ex-US funds took in $8.7 billion in June, their eighth-most all time. It was also their record-setting 36th consecutive month with inflows and their 15th month in a row with more than $1 billion in inflows — another record.
Developed ex-US single country exposures (Japan, +$2.6 billion) led the $2 billion of inflows into the Single Country category. But it wasn’t all green for developed ex-US markets. European regional exposures had $2 billion of outflows in June, their first month of outflows this year. This negativity comes despite stronger than market returns in June (6.7% versus 5.6%) and 2023 (18.5% versus 12.8%), among other tailwinds.2
Geographic ETF Flows Signal a Rebound in US Interest Amid the Rally
| In Millions ($) | June | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
|---|---|---|---|---|---|
| U.S. | 39,995 | 73,672 | 72,343 | 226,665 | 1.87 |
| Global | 472 | -2,157 | -1,484 | 2,681 | -1.28 |
| International-Developed | 8,759 | 27,336 | 15,045 | 58,865 | 4.90 |
| International-Emerging Markets | 2,076 | 9,464 | 3,047 | 17,548 | 4.44 |
| International-Region | -1,944 | 8,965 | -305 | 5,922 | 16.60 |
| International-Single Country | 2,075 | 4,475 | 2,745 | 2,603 | 4.90 |
| Currency Hedged | 1,041 | 1,971 | 1,828 | 1,082 | 14.43 |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of June 30, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.
But it wasn’t party in USA for all exposures. Sector funds had $6 billion outflows in June. However, when excluding Tech outflows, which were a reversal of the rebalance-related inflows at the end of May that inflated that month’s totals, sectors shed just $932 million.
The non-Tech outflows were led by defensive sectors’ loss of $1.5 billion. Cyclical sectors, led by Financials and Industrials, took in $400 million, however.
This was the first time since October 2022 that cyclical inflows outpaced defensives. In fact, four out of the six cyclical sectors had inflows in June. And Energy, the cyclical with the largest outflows, has been in net outflows all year as the sector has trailed the market as a result of a decline in oil’s spot price and mean reversion following outsized returns in 2022 and 2021.
The positive flows into cyclicals is a potential sign of positivity beneath the broader sector surface. More allocations to cyclicals would indicate firmer risk-on positioning by investors, as well as their view that a recession may not be on the horizon.
Sector ETF Flows Favor Cyclicals
| In Millions ($) | June | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
|---|---|---|---|---|---|
| Technology | -5,695 | 1,210 | 1,356 | 2,525 | 0.81 |
| Financial | 1,748 | 2,332 | 968 | 963 | 3.76 |
| Health Care | -316 | -4,347 | -328 | -82 | -4.18 |
| Consumer Discretionary | 732 | 2,925 | 1,853 | 1,137 | 12.77 |
| Consumer Staples | -669 | -53 | 424 | 2,844 | -0.17 |
| Energy | -2,249 | -11,242 | -5,924 | -12,448 | -12.97 |
| Materials | -1,219 | -1,445 | -2,540 | -3,401 | -3.94 |
| Industrials | 1,069 | 814 | 92 | 148 | 2.42 |
| Real Estate | 326 | -3,130 | -1,078 | -4,070 | -4.47 |
| Utilities | -525 | 10 | 189 | 837 | 0.04 |
| Communications | 171 | 2,064 | 2,024 | 1,807 | 17.90 |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of June 30, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.
Bond Investors Put the Top Down with Convertibles
Bonds took in over $18 billion in June, and almost every bond sector contributed. Only inflation-protected bonds had outflows last month, continuing their year-to-date trend amid the disinflationary dynamics impacting the economy.
While rate-sensitive core allocations, such as aggregate and government sectors, led all bond flows, credit sensitive sector flows provide the more meaningful information on investor positioning.
With high yield and bank loan funds taking in a combined $1.7 billion to go along with the $1.4 billion in investment-grade bonds, investors took a risk-on view in June. This is a departure from the year-to-date trend for the below investment-grade market, further illustrating how investors sought to jump in during June.
Inflows into emerging market bonds and convertible securities also illustrate risk taking. The $624 million into convertibles is the most-ever for a month. In fact, the category (led by one fund) did not have outflows on any day during the month, posting inflows on 16 out of the 22 trading days in June.
The resurgence in convertibles is potentially from investors seeking to participate in the current market rally, but with less volatility and more constructive valuations, given convertibles’ sector exposure, historical volatility traits, and more bond-like profile.
Bond ETF Flows Indicate Risk-On Positioning Amid the Rally
| In Millions ($) | June | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
|---|---|---|---|---|---|
| Aggregate | 6,761 | 38,320 | 21,334 | 67,043 | 9.30 |
| Government | 5,371 | 59,702 | 15,673 | 124,774 | 21.32 |
| Short Term | 1,861 | 30,209 | 3,860 | 64,201 | 18.53 |
| Intermediate | 1,392 | 10,932 | 1,974 | 25,068 | 13.29 |
| Long Term (>10 yr) | 2,117 | 18,561 | 9,839 | 35,505 | 40.87 |
| Inflation Protected | -1,520 | -9,264 | -3,568 | -19,710 | -11.89 |
| Mortgage Backed | 1,651 | 5,828 | 2,890 | 9,271 | 11.93 |
| IG Corporate | 1,484 | 8,675 | 4,202 | 25,400 | 3.82 |
| High Yield Corp. | 1,226 | -3,662 | 5,792 | 7,096 | -5.56 |
| Bank Loans | 550 | -1,995 | -609 | -5,037 | -14.96 |
| EM Bond | 767 | 980 | 712 | 1,731 | 3.68 |
| Preferred | 83 | -8 | 149 | -1,224 | -0.02 |
| Convertible | 624 | -871 | 607 | -582 | -14.06 |
| Municipal | 1,029 | 1,911 | 2,547 | 17,846 | 1.81 |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of June 30, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.
Position to Enjoy the Rally Waters
Investors’ childlike exuberance in June pushed implied volatility levels to significant lows; the CBOE VIX Index is now trading in the bottom historical 24th percentile and nearly 30% below long-term averages.3
It also pushed valuations higher, as the S&P 500’s price-to-earnings-next-12-months (P/E NTM) ratio of 20.4 is above long-term averages (18.5).4 This offers little fundamental cushion if firms are unable to deliver strong earnings results next quarter. And forecasts indicate negative growth for the third consecutive quarter.5
Altogether, despite the market gains, the rally doesn’t appear overly crowded. The broadening of depth has been supportive, as previously leadership was quite narrow and appeared unsustainable. But the rise in broad-based valuations is a concern. Similarly, if the Fed hikes rates more than the market anticipates this could lead to a risk-off tone as the Fed’s two more hike forecast6 could be viewed as too restrictive for continued growth.
Earnings will need to deliver for investors to keep enjoying the rally waters this summer. And while sentiment has become less negative, there are still more downside revisions than upside.
As a result, to position for more earnings stability and to put the fun in fundamentals this summer, investors may want to move-up in Quality (the best-performing factor in 2023)7 or rotate to overseas markets with a more constructive backdrop.
For more insight into ETF flows along with the latest charts, scorecards, and investment ideas, visit Market Trends.