This article mentions funds that have an issuer-initiated rating and/or track a Morningstar Index. For full disclosure information, please refer to the specific funds, which are demarcated with a * symbol, listed below.
July ETF Flows Highlights
- US exchange-traded fund inflows surpassed $183.6 billion in July.
- Four of the 10 ETFs with the largest inflows were driven by investors’ thirst for access to the artificial intelligence and semiconductor trade.
- Technology ETFs brought in over $17 billion, second only to ETFs in the large blend Morningstar Category, which collected $39 billion in inflows, driven by strong flows into ETFs that track the S&P 500.
- Among risk factor ETFs, iShares MSCI USA Momentum Factor ETF MTUM performed the worst, lagging its fellow factor ETF peers by a wide margin, while iShares MSCI USA Minimum Volatility Factor ETF USMV showed its defensive edge, posting a positive return.
- Ultrashort bond ETFs brought in over $12 billion in inflows for July as new Federal Reserve Chair Kevin Warsh held rates steady.
- Vanguard and iShares continue their back-and-forth battle for US ETF dominance with Vanguard overtaking iShares as the leader in July, but a third contender is growing quickly.
Global stocks and bonds struggled in July. The exhibit below shows returns for a sample of ETFs that serve as proxies for major asset classes. A blended global portfolio lost 90 basis points last month.
Stock Market Summary
While US stocks were in the red across all size segments, US large-cap stocks still managed to outperform their mid- and small-cap peers. IShares Core S&P 500 ETF IVV ended the month up by just 19 basis points, which was good enough to beat its small- and mid-cap peer ETFs by almost 2 percentage points.
Microsoft MSFT, which dropped almost 17% in June, led the mega-cap stock rally back into positive territory and ended July up over 24%. The mega-cap reversal was intensified by poor performance from smaller semiconductor and AI infrastructure stocks like Micron MU, Advanced Micro Devices AMD, and Intel INTC; each was down between 18% and 36%. Despite the AI trade driving broad market performance this year, other segments of the market had a better month despite strong flows.
Factor ETFs tell a similar story. IShares MSCI USA Momentum Factor ETF dominated the other factor ETFs in the first six months of the year, returning over 37%. However, momentum fared worse than other factors in July.
July’s steep drawdown favored low volatility ETFs. iShares MSCI USA Minimum Volatility Factor ETF outperformed all other factors and beat iShares MSCI USA Momentum Factor ETF by over 14 percentage points. The same stocks that had driven the momentum ETF higher and faster over the first half of the year hurt its performance in July. Micron and AMD are iShares MSCI USA Momentum Factor ETF’s top two holdings. The ETF’s price/fair value estimate of 1.24 in June had alarm bells ringing as the price of AI stocks rose well above their earnings-based valuations.
Bond Market Summary
Investors cautiously awaited the results of the Fed’s first meeting under new Chair Kevin Warsh; the Federal Reserve Board ultimately decided to maintain interest rates.
Ultrashort bond ETFs brought in $12.6 billion in July. IShares 0-3 Month Treasury Bond ETF SGOV accounted for roughly one-third of the entire category’s inflow, matching the previous month’s inflow of roughly $4 billion. Year to date, it has taken in more assets than any other fixed-income ETF and represents a considerable share of the ultrashort category.
Treasury yields remained relatively unchanged at the front of the yield curve from June to July, though long-term yields did rise substantially given the lack of Federal Reserve action. The 30-Year Treasury bond rate rose to 5.27 from 4.91 while T-bills moved just a few basis points throughout the month. The uneven movement in short- and long-term yields indicates that investors are requiring greater compensation for assuming longer-duration risk, while the required yield on shorter-duration debt has remained relatively unchanged.
Technology Continues to Gather Assets Despite Performance Woes
ETFs in the technology category brought in over $17.2 billion, second only to those in the large blend category, which collected $39 billion in inflows. The large blend category average, however, ended the month flat, losing just 3.00 basis points in July while the average fund in the technology category dropped 9.13 percentage points over the same period.
Technology-focused ETFs with the highest inflows all underperformed their average category peer. Roundhill Memory ETF DRAM collected over $6 billion in flows in July and marked its fourth consecutive appearance on the list of ETFs with the highest inflows. In the same month, the ETF dropped 26.64% while its peers didn’t fare much better.
- IShares Semiconductor ETF SOXX had the fourth highest inflow among US ETFs. It broke its previous month’s record high inflow by over $2 billion, ending July $7 billion higher. Despite its positive flows, the ETF dropped 21.32% in July.
- IShares MSCI South Korea ETF EWY had the eighth highest inflow among US ETFs. Its popularity shot up in July on account of investors seeking exposure to chip manufacturers Samsung 005930 and SK Hynix 000660, the ETF’s two largest holdings. The ETF ended the month $4.77 billion higher while it dropped 19.53%.
- Although it didn’t make the top 10, VanEck Semiconductor ETF SMH had the 14th highest inflow among US ETFs. It is the largest technology ETF, managing over $68 billion. In July, it brought in $3.0 billion in flows and dropped 17.7%.
While year-to-date performance remains strong for some technology-focused ETFs, July’s correction serves as a good reminder of the risks they carry when they are overconcentrated, leveraged, or focused on a very narrow theme.
Diversified US Stock Exposure Still Dominates Flows
While it’s easy to get caught up in the semiconductor noise, investors are still putting the majority of their assets into broadly diversified ETFs from the large blend Morningstar Category. The category had more than double the flows of ETFs in the technology category, and most of the money went to ETFs like State Street SPDR S&P 500 ETF SPY, Vanguard S&P 500 ETF VOO, and Vanguard Morningstar Total Stock Market ETF
VTI
. The equal-weighted average return of these three ETFs for the month of July was a loss of just 22 basis points.
State Street On the Rise
Although Vanguard and iShares continue to dominate ETF total net assets, State Street gained some ground in July. Its ETFs collected $9 billion more than iShares ETFs. The bulk of its inflows came through its pair of S&P 500 ETFs, State Street SPDR S&P 500 ETF and State Street SPDR Portfolio S&P 500 ETF SPYM, which together brought in more than $20 billion. In the same month, iShares Core S&P 500 ETF saw an estimated net outflow of $18 billion. Granted, these S&P 500 index-tracking ETFs contain such a large quantity of assets that they are almost always guaranteed a spot among the ETFs with the largest inflows or outflows in any given month.
