Buy in May, and Here to Stay?
As we enter a new month, let’s take a look at investor interest in different ETF segments in the previous month and consider what it indicates about investor expectations for the month to come.
Set today’s market in the 1800s London Regency era depicted in Netflix’s Bridgerton, and Lady Whistledown would have written numerous passages in her Society Papers regarding Queen Charlotte selecting mega-cap Tech stocks as her “diamond” of the season. Once again, Tech and Tech-related leaders (Big Tech)1 put on a sparkling display of earnings growth and return momentum last month.
With such strong momentum, the broader Tech and Communication Services sectors, where Big Tech resides, contributed 83% of the US market’s return in May — continuing the year-to-date trend of concentrated market returns (66% of 2024’s return).2 And these powerful US returns propped up global equities’ near 4% rally last month.
Strong market returns, concentrated or not, spurred risk-on buying behavior from ETF investors, as “Sell in May, and Go Away” was replaced with “Buy in May, and Here to Stay?”
Buying Behavior Leads to Best May Inflows Ever
ETFs gathered more than $90 billion last month, as investors were big buyers in May. The $92 billion was the month of May’s best ever, and ninth-most ever overall for any month. It also pushed 2024 totals to over $320 billion.
This translates to a pace of $64 billion a month this year, which could add up to a $770 billion end-of-year total. Of course, this assumption doesn’t account for the typical seasonally fueled second-half bump each year.
Add the usual 31% bump for second-half inflows, and 2024’s inflows could be the second-most ever at $890 billion (Figure 1), with a real puncher’s chance at being the most ever.
Three secular ETF buying behavior trends were on display in May:
- Bond ETFs took in $28 billion, their seventh-best month ever, for a total of $94 billion for 2024. If this pace continues, bond ETFs could take in $223 billion this year, their most ever and their fourth year in the past five with over $200 billion of inflows, driven by a wide range of use cases for bond ETFs in portfolios.
- Low-cost ETFs garnered $40 billion in May, pushing their year-to-date total to $181 billion — 55% of all inflows, as investors seek out transparent cost efficient exposure to key asset allocation building blocks.
- Active ETFs added $22 billion; their 50th consecutive month with inflows was the third-most ever.
As investors continue to tap a new vehicle for alpha generation and outcome driven strategies, active ETFs have now taken in over $108 billion for the year, or 33% of all ETF flows — off a 7% share of overall ETF assets. This pace is unlike anything we have seen — and active ETF inflows could hit a record $260 billion if the flow trends continue.
If that full-year total and +$890 billion for the broader ETF industry are both met, it would mean active ETFs taking in a record 29% of all ETF inflows — seven percentage points greater than the record 22% from 2023.
Equity Flows Signal Risk-on Mindset in May
Buoyant equity markets supported overall risk taking, as the rolling differential between stock and bond ETF flows remains in risk-on territory. Equities’ $93 billion more inflows than bond ETFs over the past three months bounced off its historical 80th percentile level and moved higher in May.
US equity ETFs drove more than 82% of the total equity flows in May, a figure greater than their market share of assets (79%) and a sign of flows following returns.
Yet, there is still interest to express risk overseas.
International-developed ex-US funds’ $4 billion was their record 47th month in a row with inflows, and all non-US markets had inflows in May. European regional ETFs supported the regional category in May and have now had four consecutive months with inflows — taking in $300 million last month and $3 billion over this four-month stretch. A period coinciding with supportive earnings and economic momentum trends from the region, a likely catalyst for the recent turn in sentiment.
Figure 3: Geography Flows
| In Millions ($) | May | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
|---|---|---|---|---|---|
| U.S. | 49,951 | 172,939 | 127,095 | 442,830 | 3.40% |
| Global | 1,772 | 2,405 | 2,283 | 8,127 | 1.25% |
| International: Developed | 4,361 | 21,178 | 14,482 | 53,242 | 3.09% |
| International: Emerging Markets | 2,268 | 5,074 | 2,608 | 10,802 | 2.09% |
| International: Region | 460 | 3,455 | 1,952 | -3,354 | 4.63% |
| International: Single Country | 1,690 | 6,040 | 3,069 | 12,759 | 5.72% |
| Currency: Hedged | 770 | 5,760 | 3,996 | 8,081 | 32.89% |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of May 31, 2024. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.
Sectors’ $1 billion of net outflows ran counter to all other flow trends last month, signaling restrained sentiment rather than the risk-taking mentality visible elsewhere.
This was also the first time sectors had outflows this year. The May outflows were mainly driven by Health Care (-$939 million), Real Estate (-$1.1 billion), and Tech (-$2 billion). This departure from the 2024 Tech trend (+$9 billion in inflows year to date) could be just a brief profit-taking trade given the sector is up 17% this year.3
Excluding Tech, cyclicals and defensives took in an equal $200 million each, while Communication Services added $300 million. For defensives, Utilities (up 18% since March) carried the inflows with +$800 million.4 Meanwhile, Industrials drove cyclicals with $720 million of inflows — raising their 2024 total to a sector second-best of nearly $3 billion.
Given ex-Tech flows were positive and most sectors had inflows (only two others had outflows), risk sentiment is not as dour as the headline total would indicate.
Figure 4: Sector Flows
| In Millions ($) | May | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
|---|---|---|---|---|---|
| Technology | -2,010 | 8,980 | 261 | 8,860 | 3.83% |
| Financial | 31 | -722 | 665 | -5,374 | -1.07% |
| Health Care | -939 | -2,873 | -3,654 | -9,872 | -3.06% |
| Consumer Discretionary | -144 | 611 | -867 | 3,694 | 1.63% |
| Consumer Staples | 529 | -1,500 | -394 | -6,634 | -5.72% |
| Energy | 655 | 1,247 | 2,777 | 2,890 | 1.61% |
| Materials | 32 | -11 | 697 | -2,567 | -0.03% |
| Industrials | 720 | 2,865 | 2,422 | 4,691 | 6.93% |
| Real Estate | -1,055 | 216 | 93 | 3,531 | 0.29% |
| Utilities | 831 | -1,633 | 26 | -3,720 | -7.45% |
| Communications | 311 | -6 | 234 | 2,126 | -0.03% |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of May 31, 2024. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.
Bond Flows Paint a Risk-on Picture Too
Aggregate bond ETFs’ $9 billion of inflows in May led all bond sectors, followed by the $7 billion into government bond exposures. Yet, those two categories have the most assets, so their large share of flows is not entirely surprising.
Relative to assets, the flows into high yield (+$5 billion) and bank loan & CLO ETFs (+$3.5 billion) are far more noteworthy. Those flows are 7% and 13% of their respective start-of-month assets, illustrating investors’ distinct preference to overweight those two credit segments.
These allocations are justified by recent returns, as both high yield and bank loans outperformed broader Agg bonds in May and so far this year.5 And with positive rating trends, supportive fundamental growth, and a growing economy, investors may continue to take on credit risk — even with spreads tight.
Figure 5: Bond Sector Flows
| In Millions ($) | May | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
|---|---|---|---|---|---|
| Aggregate | 8,872 | 43,727 | 29,760 | 85,898 | 8.63% |
| Government | 6,763 | 18,249 | 12,994 | 65,797 | 4.80% |
| Short Term | 2,525 | -1,483 | 4,281 | 11,111 | -0.73% |
| Intermediate | 2,887 | 14,482 | 6,661 | 26,599 | 14.13% |
| Long Term (>10 yr) | 1,351 | 5,250 | 2,052 | 28,087 | 6.17% |
| Inflation Protected | -559 | -3,096 | -2,358 | -13,341 | -5.16% |
| Mortgage Backed | 1,026 | 4,802 | 4,221 | 12,558 | 7.80% |
| IG Corporate | 1,225 | 12,472 | 1,634 | 20,649 | 5.30% |
| High Yield Corp. | 5,123 | 4,122 | 2,286 | 13,587 | 5.65% |
| Bank Loans and CLOs | 3,585 | 10,360 | 7,746 | 16,931 | 49.49% |
| EM Bond | 653 | -203 | 1,014 | 1,503 | -0.68% |
| Preferred | -62 | 743 | 362 | 1,477 | 2.18% |
| Convertible | 105 | 228 | 118 | 399 | 4.19% |
| Municipal | 970 | 2,657 | 3,153 | 17,642 | 2.14% |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of May 31, 2024. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.
Broadening Growth Supports Buying Behavior to Stay After May
While the broader US equity market posted +6.3% year-over-year earnings-per-share (EPS) growth in Q1 2024,6 Big Tech really carried the show with its +56% growth.7 Without Big Tech, broader growth would have been -3.3% and overall market returns less in May.8 Not unlike how Bridgerton lost a little bit of its appeal when the Duke left after the first season.
Despite the heliocentric nature of Big Tech, the supporting cast is likely to start to receive some Francesca Bridgerton-esque notoriety in upcoming earnings seasons. While Big Tech will likely remain a source of growth, revisions for the rest of the market have recently turned positive.9 And for the second half of 2024 and 2025, the rest of the market is expected to contribute more to growth than the top 10 stocks.10
This still positive, but less concentrated growth, supports the broader rally. And that favors looking further down the cap spectrum for other “diamonds,” both in small caps and within Tech. For 2024 and 2025, an equal-weight Tech leader exposure is projected to have greater growth than traditional Tech and the market.11
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