ETF Investing: Stock ETFs saw big inflows over July as the market rallied

Mutual Funds


Investors returned to assets perceived as risky over the month of July, plowing money into stock-based exchange-traded funds as the second-quarter earnings season came in ahead of forecasts, reassuring market participants that economic fundamentals were strong enough to justify valuations.

According to data from FactSet, ETFs were broadly favored over the month, but—as usual— stock-based products saw the most attention. Equity-based ETFs saw inflows of more than $18 billion over the month, while another $10.2 billion flowed into fixed-income products. Stock products are by far the most widely used ETFs; the category has more than $2.7 trillion in assets, compared with $587.6 billion in bond funds.

Only one asset class had outflows over the month, with $1.2 billion being pulled from commodity funds.

The category of large-cap U.S. stock funds saw inflows of nearly $3.9 billion over the course of the month. While this represented the highest flows of any ETF category, the segment is also one of the largest and most popular in the ETF universe, with some $629.3 billion in assets. As such, flows in and out of it, in terms of dollar figures, tend to be extremely volatile.

The inflows corresponded with a strong period for the stock market. The Dow Jones Industrial Average

DJIA, -0.32%

 rose 4.7% over the month of July, its strongest monthly gain since January, while the S&P 500

SPX, -0.10%

 gained 3.6% and the Nasdaq Composite Index

COMP, +0.46%

 was up 2.2%.

There were also sizable moves into other “risk” assets, however. The category of U.S. high-yield corporate bonds had inflows of $2 billion, the second-highest of any category, while $1.32 billion flowed into ETFs tracking the U.S. technology sector. Tech stocks were among the most volatile last month; while the sector hit a record last month—extending its strong year-to-date gains—it also came under heavy selling pressure following results from Facebook.

Among other ETF segments seeing high inflows last month were stock funds focused on dividend payers ($1.5 billion in inflows) and two sector funds: real estate ($1.1 billion), and health-care ($1 billion).

Notably, U.S. large-cap value funds also saw interest over the course of the month, with roughly $1.4 billion moving into the group. The inflows were the latest sign that investors are showing more interest in the strategy following a decade where growth-based strategies outperformed. However, they didn’t abandon growth funds, as the category of large-cap growth ETFs had inflows of nearly $560 million.

Read: After a decade of wins, the end may be near for one of Wall Street’s best stock trades

Only one ETF category, dedicated to international stocks, had outflows of more than $1 billion over the month. Roughly $1.08 billion was redeemed from funds offering exposure to the total equity markets of all developed economies, excluding the U.S. The retreat came amid ongoing uncertainty surrounding trade policy between the U.S. and its major trading partners.

The overall positive flows over the month comes after slight outflows over the month of June, when nearly $700 was pulled amid a period of high volatility in the U.S. June was the third month of negative flows thus far this year, which is notable in and of itself. Amid years of blistering growth in ETF assets, 2018 stands as the year with the highest number of months with negative flows since 2008.

Ryan Vlastelica is a markets reporter for MarketWatch and is based in New York. Follow him on Twitter @RyanVlastelica.

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