Deconstructing the market’s chemical makeup with ETF flows
Track shifting investor sentiment through our latest ETF flows analysis.
Hydrogen is the simplest element in the periodic table, consisting of just one proton and one electron. Yet, despite its simplicity, hydrogen can be both powerful and volatile.
Remove the electron, and what remains is a positively charged ion capable of bonding with other atoms to form compounds (e.g., H2O). But remove the proton, and the atom ceases to exist.
That chemistry lesson mirrors the pair of market forces that have defined this year, as resilient fundamentals have continually battled fragile macroeconomic headlines.
The negatively charged side of the equation has been macro fragility. Inflation, fiscal deficits, evolving monetary policy, shifting trade and fiscal agendas, and persistent geopolitical tensions have created an environment prone to volatility.
The positively charged side of the equation has been resilient company fundamentals. AI-driven optimism and strong corporate earnings growth have counterbalanced those pressures and helped support risk assets throughout the year. Yet when earnings headlines fade and company-specific news becomes scarce, the macro backdrop tends to regain control of the narrative, becoming the dominant driver of day-to-day market movements.
September asset returns were another example of that shift. But were flows positively or negatively charged?
2026 in flows hit records
On the final day of September, US-listed ETFs broke the annual flow record. A $13 billion inflow pushed September's total to $151 billion and year-to-date inflows to a record $1.54 trillion, surpassing the previous high-water mark of $1.52 trillion set in 2025 (Figure 1).
The speed with which investors have pushed ETF inflows to a new record this year highlights just how central the vehicle has become to portfolio construction. Investors continue to favor ETFs as their primary tool for allocating capital, building portfolios, and adapting to changing market conditions, while mutual funds remain mired in persistent outflows. Over the past 10 years, US-listed mutual funds have experienced $3 trillion of outflows, while US-listed ETFs have attracted $7.8 trillion of inflows.
ETFs’ new annual record also underscores the enduring appeal of core exposures. Low-cost equity and fixed income building blocks have attracted nearly $700 billion this year. Beyond core allocations, active ETFs have cemented their position as a mainstream force. Active strategies have already gathered a record $570 billion this year, as investors increasingly seek both alpha-generating approaches and outcome-oriented solutions through the ETF wrapper.
The bottom line? This year's ETF inflow record reflects a structural shift in investor behavior. Whether building core portfolios, accessing active strategies, or making tactical adjustments, investors increasingly view ETFs as the vehicle of choice.
Tactical bond trades seek to limit duration and inflation risks
Beyond those core motivations of low-cost and active, flows continue to demonstrate ETFs' role in tactical portfolio positioning. Investors have used ETFs to rapidly adjust portfolios in response to changing market conditions.
Short-term government bond ETFs are a prime example. They have attracted a record $99 billion year to date, including $18 billion in September alone, as investors seek higher yields and reduced duration risk amid a rising-rate environment driven by the Fed’s more restrictive stance. Over the past three months, inflows into short-term government bond ETFs have also approached record levels (Figure 2).
Consistent with that trend, credit inflows also favored lower-duration exposures. Floating-rate—and therefore low-duration—senior loan exposures attracted $300 million of inflows, while securitized asset-backed exposures with a floating-rate bias, such as CLO funds, gathered $3 billion.
Meanwhile, fixed-rate investment-grade and high yield credit ETFs experienced $2.5 billion of outflows. Performance trends reflected this positioning, with loans outperforming fixed-rate credit in September.
With additional rate hikes and a higher-for-longer policy stance possible, the broader short-term corner of the bond market may remain a tactical standout as investors seek front-end income with limited duration risk. And for credit-sensitive loans, a higher rate floor coupled with still-positive economic growth and corporate profit cycles should continue to support credit fundamentals, reinforcing both the return and flow trends observed this year.
Figure 3: Fixed income flows
| In millions ($) | September | Year-to-date | Trailing 3-month | Trailing 12-month | Year-to-date (% of AUM) |
|---|---|---|---|---|---|
| Aggregate | 22,968 | 190,733 | 68,506 | 249,759 | 23.22% |
| Government | 26,416 | 125,202 | 56,174 | 159,917 | 23.86% |
| Short term | 19,173 | 100,338 | 42,123 | 122,682 | 39.22% |
| Intermediate | 3,409 | 17,085 | -244 | 29,335 | 11.31% |
| Long term (>10 yr) | 3,835 | 7,779 | 14,294 | 7,899 | 8.66% |
| Inflation-protected | 1,213 | 13,459 | 4,613 | 15,587 | 19.31% |
| Mortgage backed | -2,360 | 6,738 | 86 | 6,343 | 6.73% |
| IG corporate | -2,226 | 47,528 | 6,061 | 61,321 | 15.52% |
| High yield corp. | -315 | 4,118 | -19 | 11,103 | 3.69% |
| Bank loans | 311 | 759 | 628 | 1 | 3.70% |
| Asset-backed | 3,788 | 21,090 | 9,333 | 21,690 | 53.70% |
| EM bond | -1,429 | 232 | -313 | 3,395 | 0.67% |
| Preferred | -180 | 1,785 | 142 | 2,349 | 4.50% |
| Convertible | 375 | 3,979 | 799 | 5,054 | 45.37% |
| Municipal | 13,569 | 53,462 | 23,089 | 69,901 | 28.52% |
Source: Bloomberg Finance, L.P., State Street Investment Management, as of September 30, 2026. The top two/bottom two categories per period are highlighted. Performance data quoted represents past performance. Past performance does not guarantee future results.
The last notable trend in fixed income flows is the growing preference for inflation-resilient bond strategies as inflation remains a persistent risk. Inflation-linked bond ETFs took in $1.2 billion in September—their 20th month out of the past 21 with inflows. Year to date, they have gathered $13 billion, their highest total since 2021.
That focus on inflation resilience extended beyond bonds; broad commodity ETFs added $1 billion in September, lifting 2026 inflows to $7.2 billion—just below the record $8.2 billion gathered in 2022.
Equity flows propelled by larger than normal non-US allocations
Flows were broadly positive across regions, reinforcing the push for greater geographic diversification.
Non-US equities attracted $30 billion, or 36% of equity flows—more than double their 17% share of assets. This pattern holds across periods, signaling that diversification beyond US equities is more than a one-month trend (Figure 4).
International-developed ETFs captured most non-US flows, led by low-cost core strategies as investors sought durable, cost-efficient building blocks.
Emerging market ETFs benefited from the same structural tailwinds and strong performance, returning 21% versus 12% for US equities.1 Although September inflows were a modest $1 billion, they marked the category’s 19th positive month in the past 20.
Figure 4: Geographic flows
| In millions ($) | September | Year-to-date | Trailing 3-month | Trailing 12-month | Year-to-date (% of AUM) |
|---|---|---|---|---|---|
| US | 48,499 | 654,897 | 214,992 | 928,678 | 7.73% |
| Global | 6,099 | 71,903 | 14,649 | 92,835 | 25.74% |
| International: Developed | 20,818 | 150,437 | 48,939 | 198,441 | 13.53% |
| International: Emerging markets | 1,400 | 52,006 | 13,541 | 68,722 | 14.02% |
| International: Region | 1,075 | 5,083 | 4,017 | 11,819 | 5.24% |
| International: Single country | 991 | 30,533 | 10,921 | 34,207 | 20.42% |
| Currency hedged | 8 | 3,781 | 1,352 | 5,038 | 9.80% |
Source: Bloomberg Finance, L.P., State Street Investment Management, as of September 30, 2026. The top two/bottom two categories per period are highlighted. Performance data quoted represents past performance. Past performance does not guarantee future results.
Muted sector flows are partly to blame for the weaker-than-normal demand for US-focused exposures. Sectors had $100 million of outflows, as cyclical sectors lost $2 billion and Tech shed $200 million, while defensive sectors attracted $2 billion of inflows.
Despite the outflows, sectors remain on pace for a record year after finishing the first nine months with $86 billion of inflows—already surpassing the prior annual record of $67 billion set in 2021.
Chemically engineering portfolios
September showed how this new fragmented, inflation-sensitive regime has changed the market reaction. Persistent fiscal deficits and other macro pressures added helium to the bond term premium, pushing 10- and 30-year Treasury yields to levels last seen in 2002.2
With little positive fundamental news to offset widening risk premiums—and higher rates raising the discount rate on future cash flows—both stocks and bonds fell. That joint decline is no longer unusual: since January 2021, global equities and bonds have fallen together in 20 of the 23 months when global equities posted negative returns.3
But October may bring a renewed positive charge to the market's nucleus. Earnings season returns. But if AI-driven optimism and elevated expectations aren’t validated by another strong earnings season, the earnings-on, risk-on dynamic could weaken. And when only one force remains, markets can quickly lose their chemical balance.
That brings us back to chemistry and, more importantly, portfolio construction. Individual elements can be useful, powerful, and sometimes explosive. But relying on one often increases volatility rather than reducing it. Strength comes from combinations.
Consider silicon and oxygen. Silicon is a brittle metalloid; oxygen is an invisible gas. Yet combined, they form silicon dioxide, a compound known for its durability and resilience. Portfolio construction works much the same way.
In a macro environment defined by inflation risks, geopolitical uncertainty, higher rates, and periodic growth scares, resilience is rarely found in a single asset class. It comes from combining assets with different characteristics that can offset one another's weaknesses and reinforce their strengths. Particularly, inflation-resilient macro solutions.
Just as strong chemical bonds create durable compounds, strong diversification can create more resilient portfolio outcomes, even when individual assets appear fragile on their own.
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