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Flash Flows

A Summer Swoon in Sentiment Sinks ETF Inflows

  • Historically the weakest month for ETF inflows, this August was no different as inflows were just $15 billion. 
  • Equities took in $7.5 billion; US equity funds had only $6 billion while emerging market and Europe-focused ETFs had outflows.
  • Bonds added $11 billion, largely driven by the $8 billion into ultra-short duration government bond funds. Credit sensitive exposures had $3 billion of outflows.
Head of SPDR Americas Research

The market’s summer dreams have been dashed, as the good vibrations from June and July didn’t carry over into August. No more strolling down the dock drinking lemonade. Rising rates and fears of a growth-slowdown spillover from China put an end to the rallying summer nights of June and July.

After losses on 57% of the month’s days, global stocks fell by 3%.1 August ended with only 46% of stocks trading above their 50-day moving average — compared to 73% at the start of the month.2 At the same time, the upward move in rates (5-year real yields are now at their highest since 2007) alongside slightly wider credit spreads pressured bond returns.3 Core bonds fell by 0.8% in August, their fourth month in a row of losses.4

With lackluster returns from both major asset classes, the standard 60/40 portfolio registered its worst monthly loss since February.5 With this swoon in sentiment, buying behavior was equally lackluster.

August ETF Inflows Are Weak Again

August is historically the weakest month for ETF inflows, averaging $16 billion versus $27 billion in all other months. With sentiment swooning, this August was no different. This August’s $15 billion was actually below that of the historically weak August average (Figure 1).

Combined with somewhat subpar inflows to start the year, August’s low total has put ETFs’ full-year $500 billion inflow figure in jeopardy. Year-to-date inflows are now $292 billion. Inflows this year have averaged $36 billion a month. Projecting that figure out over the next four months equates to a full-year total of just $438 billion.

Yet, inflows in September, October, November, and December tend to be the best of the year (Figure 1). But even using those historical averages to project the next four months, total inflows would be only $460 billion. If a more recent five-year average is used for those months, inflows could reach $499 billion. This forecast has a puncher’s chance, particularly if all those sideline-sitters allocate capital.

But 2023 could have the weakest total ETF inflows since 2019 — ending the three-year streak of ETFs taking in more than $500 billion a year (Figure 2).

US-focused ETFs and Sector Leaders Had Top Inflows

US-focused exposures’ $6 billion represented most of the geographical inflows last month. Yet, that doesn’t mean much as the $6 billion of inflows is 78% below the average US inflow of +$27 billion.

International developed exposures were the only other region with meaningful inflows, taking in more than $3 billion to continue their record run of 38 consecutive months with inflows (Figure 3).

Beyond the focus on broad developed exposures, investors showed little interest in venturing overseas. Given the concerns over China, emerging market (EM) funds had over $1 billion of outflows (Figure 3). Similarly, outflows in single-country China and Taiwan funds led that category to post flat flows.

Figure 3: Geographic ETF Flows Signal Limited Interest to Go Overseas

In Millions ($) August Year to Date Trailing 3
Trailing 12
Year to Date
(% of AUM)
U.S. 5,766 112,637 78,658 222,541 2.87%
Global 327 -1,299 1,328 3,817 -0.77%
International-Developed 3,484 34,509 15,863 57,039 6.19%
International-Emerging Markets -1,205 9,551 2,135 16,389 4.47%
International-Region -812 6,486 -4,423 7,226 12.01%
International-Single Country 0 6,969 4,569 8,554 7.63%
Currency Hedged 112 2,666 1,751 2,074 19.55%

Source: Bloomberg Finance, L.P., State Street Global Advisors, as of August 31, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.

Within the US there were some noticeable trends at the sector level, however. Reminiscent of how Larry Bird, Robert Parish, and Kevin McHale led the Celtics to a decade of dominance in the 80s, just three sectors are driving flows and returns in 2023. Tech, Communication Services, and Consumer Discretionary sectors are all up more than 30% this year — and are the only three sectors beating the market.6

They are also the only three sectors with meaningful inflows in August as well as this year (Figure 4). Last month, they had a combined $5 billion of inflows, with Tech being the Larry Legend of the bunch. If not for these three leaders, sectors would have had net outflows of $4.7 billion. The same trend is true year to date. For the year, these three sectors have amassed $12 billion, while all other sectors have lost a combined $15 billion.

The strong flows reflect a bit of return chasing along with the investment mentality of buying growth when growth is scarce. While these three sectors rank the highest based on price momentum, they also rank the highest based on earnings sentiment.

Figure 4: Sector ETF Flows Favor Just Three Sectors

In Millions ($) August Year to Date Trailing 3
Trailing 12
Year to Date  (% of AUM)
Technology 4,310 5,153 -1,769 5,523 3.47%
Financial -2,492 2,206 1,622 -1,501 3.56%
Health Care -89 -5,747 -1,716 -2,902 -5.53%
Consumer Discretionary 259 4,114 1,928 3,138 17.99%
Consumer Staples -830 -267 -884 1,757 -0.85%
Energy 244 -9,512 -519 -8,809 -10.98%
Materials -717 -1,317 -1,091 -1,785 -3.59%
Industrials -383 1,819 2,074 1,755 5.42%
Real Estate -244 -2,468 988 -2,284 -3.52%
Utilities -208 -397 -932 -827 -1.52%
Communications 384 3,364 1,471 2,796 29.17%

Source: Bloomberg Finance, L.P., State Street Global Advisors, as of August 31, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.

Ultra-Short Bonds Lead ETF Inflows

Bond ETFs took in $11 billion in August, but 73% of those flows were driven by the $8 billion (ninth-most all-time for a month) into ultra-short and short-term government bond exposures. That percentage is noteworthy as the category makes up only 14% of total bond assets.

The significant difference between flow share and asset share reflects a distinct tactical allocation decision by investors, one likely driven by two motivations: 1) de-risk 2) seek improving income as the Fed may once again raise rates in September. If it does, that could push yields (and income streams) higher.

That short end of the curve wasn’t the only area to see inflows; both intermediate and longer-duration government bonds saw inflows (a de-risk move). The total government category had $10 billion of inflows in August, equating to 92% of all bond flows last month — well above what their 25% share of assets would indicate.

Investors de-risking amid the summer swoon shunned credit sensitive exposures. High yield lost $1 billion and has had nearly $4 billion of outflows in 2023. Investment-grade corporate bond funds saw $600 million of outflows.

Of the credit sensitive sectors, only senior loan and convertible bond ETFs had inflows in August. For convertibles, this is the third month in a row with inflows, and they’ve now taken in $1.1 billion over that time frame.

Figure 5: Bond ETF Flows Indicate Risk Off Positioning

In Millions ($) August Year to Date Trailing 3
Trailing 12
Year to Date
(% of AUM)
Aggregate 3,332 44,107 12,569 62,620 10.70%
Government 10,116 75,947 22,037 120,148 27.13%
Short Term 8,026 36,339 8,287 66,052 22.29%
Intermediate 1,944 15,312 5,898 21,285 17.87%
Long Term (>10 yr) 146 24,296 7,852 32,812 53.50%
Inflation Protected -1,894 -11,019 -3,274 -20,642 -14.14%
Mortgage Backed 185 7,253 3,076 10,723 14.51%
IG Corporate -675 9,689 2,498 17,271 4.27%
High Yield Corp. -1,049 -3,992 991 5,072 -6.05%
Bank Loans 52 -1,908 637 -4,136 -14.31%
EM Bond -851 756 543 595 2.84%
Preferred -2 230 321 -1,205 0.70%
Convertible 84 -357 1,137 -533 -5.77%
Municipal 1,276 4,914 4,033 20,461 4.63%

Source: Bloomberg Finance, L.P., State Street Global Advisors, as of August 31, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.

Stay Invested Despite the Sentiment Swoon

With earnings season in the rearview, directional trends will now become even more reliant on any economic data that could help forecast Federal Reserve actions or growth outlooks (i.e., recession versus no recession).

The Fed meeting in September will capture attention. And, headlines about China growth and potential government shutdowns will replace those about AI companies significantly beating earnings expectations.

Seasonality effects also could extend this late summer swoon into September (still a summer month based on the seasonal calendar). Historically, September has seen some of the weakest returns. Since 1956, the average September return for the S&P 500 has been -0.89%, the worst of any month. Average daily September returns since 1956 are also the lowest of any month (-0.04%).7

But the less-than-sanguine sentiment entering September shouldn’t force investors to the sidelines. After all, the 60/40 portfolio is still up this year. Structuring portfolios to stay invested with lower market risks may be one way to keep some of the summer loving going past the fall equinox.

This means considering equity strategies with an imbedded factor bias toward lower volatility, but with sufficient upside capture due to a mix of return-seeking factors like Quality and Value. In addition, active core bond mandates can help investors pursue attractive income opportunities while balancing the macro risks.

For more insight into ETF flows along with the latest charts, scorecards, and investment ideas, visit Market Trends.

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