ETF Investors Jump Back into the Market

By:

Head of SPDR Americas Research

  • 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.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.

Monthly flows break above averages in June ($ Billions)

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

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

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

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Footnotes

1 Bloomberg Finance, L.P, as of June 30, 2023 based on the MSCI ACWI Index, S&P 500 Index, and S&P 600 Small Cap Index
2 Based on the EuroStoxx 50 Index and the MSCI ACWI Index as of June 30, 2023 per Bloomberg Finance L.P.
3 Bloomberg Finance, L.P., as of June 30, 2023
Bloomberg Finance, L.P., as of June 30, 2023
FactSet as of June 30, 2023
Based on the Federal Reserve dot plots, June 30, 2023
Bloomberg Finance, L.P., as of June 30, 2023 based on the MSCI USA Quality Index

Glossary

S&P 500® Index is a market-capitalization-weighted stock market index that measures the stock performance of the 500 largest publicly traded companies in the United States.
MSCI ACWI Index is a market-capitalization-weighted stock market index that measures the stock performance of the companies in developed and emerging markets.
MSCI USA Quality Index is a an exposure of US firms with quality traits.
S&P 500 Equal Weighted Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.
S&P 600 Small Cap Index is a market cap weighted index of the smallest 600 companies is the S&P 1500 Index.
EuroStoxx 50 Index is Europe’s leading blue-chip index for the Eurozone, provides a blue-chip representation of supersector in the region.

Originally Posted July 5, 2023 – ETF Investors Jump Back into the Market

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