ETFs smash previous record for monthly flows in July

Investors poured record sums into exchange traded funds in July, highlighting the exuberance that gripped global financial markets before this week’s sharp sell-off.

Net inflows into ETFs globally hit $195bn in July, according to figures from BlackRock, totally eclipsing the monthly record of $169bn in December 2023. About $124bn of that flowed into US-listed ETFs, the second-highest amount on record behind December’s $129bn.

The buying frenzy was wide ranging, with fixed income ETFs attracting a record $60.5bn, equity funds sucking in $127bn — their best month since December — and gold ETFs grabbing $3.2bn, the highest figure since March 2022. Active ETFs in the US once again set a record for new investments with $27.9bn after previously setting high water marks in January, March and December, according to Morningstar.

Todd Rosenbluth, head of research at VettaFi, a consultancy, said July’s record-breaking spree was driven by rising expectations that the US Federal Reserve would soon join in the global monetary easing cycle, providing a more supportive backdrop for markets globally.

“There was strong optimism that the Fed would begin cutting interest rates at a reasonable pace, and investors embraced ETFs to get exposure to the broad market,” Rosenbluth said, with ETFs tracking the S&P 500 and small-cap Russell 2000, as well as corporate bonds, particularly in demand.

Pat Tschosik, senior portfolio strategist at Ned Davis Research, also said the increased belief in a coming Fed cut had turbocharged flows into fixed income strategies in recent weeks.

“We had a very strong feeling that bonds were going to rally, and all this did was accelerate that bond buying — maybe to the point where we’ve overdone it,” Tschosik said.

Despite the market ructions of recent days, Rosenbluth said ETF investors had kept the faith, with Monday — the worst day of the global market sell-off — seeing a further $3.8bn of net inflows rolling into the SPDR S&P 500 ETF Trust (SPY), $1.8bn into the Invesco QQQ Trust (QQQ) and $625mn into the iShares Core S&P 500 ETF (IVV), according to VettaFi’s data.

While this is probably a positive sign for markets, a degree of uncertainty must remain, given that any increased demand to short these ETFs would also result in net inflows.

VettaFi’s data does suggest that US-listed small cap ETFs suffered $1bn of outflows on Monday, after economic data released on Friday hinted at a sudden weakening of the US economy.

“For small caps to remain in favour we need to see a [US] recession being avoided,” Rosenbluth said, even if growing expectations of aggressive US rate cuts should prove supportive.

Karim Chedid, head of investment strategy for iShares in the Emea region at BlackRock, was also upbeat.

As of Friday, when market volatility had already started to rise, Chedid said “the [ETF] flow picture hadn’t drastically changed” from July’s record inflows, according to BlackRock’s data.

More broadly, Chedid did not believe July’s record ETF buying, and the subsequent market upheaval, was a sign of investors getting carried away by irrational exuberance.

“In the past couple of days we have had orderly trading. We haven’t had panic or a reversal of exuberance,” he said. “We have seen some unwind of carry [trades] but there hasn’t been panic selling.”

Chedid said that equity market valuations were supported by “a solid earnings picture, so I do think that the flows are backed up by fundamentals”, rather than merely sentiment.  

July’s record inflows were driven by buying pretty much across the board.

Gold, which saw a third straight month of net buying, was being used “as a geopolitical risk hedge [rather] than an equity drawdown hedge”, as well as a “broad portfolio diversifier”, according to Chedid.

In fixed income, government bond ETFs pulled in $19.8bn, the most since October 2023, with both short and longer duration funds witnessing similar levels of demand.

Investment grade corporate bonds attracted $13.6bn, the second-highest monthly tally on record, “holding up quite well, even though spreads have tightened”, Chedid said.

High-yield corporate bonds accounted for a further $4bn after being flat in June, and emerging market debt notched up a fourth consecutive month of buying, taking in $3.2bn.

On the equity side, technology ETFs continued to lead sector flows, with a further $10bn of buying, while financials, industrials and utilities ETFs were also in demand.

Chedid said this painted a picture of “breadth in equity flows, not a rotation”.

“A lot of commentators have been talking about market rotation, out of tech into other sectors, into quality and value [stocks]. That is not what we saw,” he added.

Nevertheless, Chedid believed demand for utilities, as well as healthcare, which chalked up a second consecutive month of inflows, showed some investors were positioning into more defensive sectors that typically benefit from lower rates.

US small cap ETF flows hit $14.2bn — the second-highest figure on record.