The ETF Flowdown: Q2 2024

But the bond market reached an inflection point in late April – swinging from bearish to bullish, as the 10-year Treasury yield peaked at 4.73%. That sparked a mild pullback in the S&P 500, which has virtually mirrored the action in bond yields ever since. This came amid a couple of cooler inflation prints, 4% unemployment and slightly softer retail and manufacturing data. 

Investors continued to bet broadly on U.S. equities by scooping up shares of the Vanguard S&P 500 ETF (VOO A) and iShares Core S&P 500 ETF (IVV A) – which led the charge, with net inflows of $22 billion and $10 billion, respectively. Lower-cost options like SPDR Portfolio S&P 500 ETF (SPLG A-) – the cheapest cap-weighted S&P 500 ETF offering on the market – were once again near the top of the list, even while the SPDR S&P 500 ETF Trust (SPY A-) suffered sizable outflows.

With just two days left to go in June, U.S. ETFs are now pacing for their 26th straight month of net inflows.

Nvidia’s steep sell-off may have rattled investors this week, but tech was still very much the dominant trade in the second quarter. With a soft-landing scenario realized, the expectation is that rates have peaked but may not necessarily be coming down. Strong earnings and flourishing AI enthusiasm have spurred high-quality growth stocks to drive large chunks of broad-based index advances.

The Vanguard Growth ETF (VUG B+), Invesco QQQ Trust (QQQ B) and iShares S&P 500 Growth ETF (IVW B+) all topped the flow charts in the second quarter. BlackRock has also rebalanced its model portfolios and ramped up growth exposure as a result.

Predictably, semiconductors proved to be a bright spot. The VanEck Semiconductor ETF (SMH B) netted more than $3 billion in the second quarter. The iShares Semiconductor ETF (SOXX B) was also a big winner – amassing north of $1.2 billion in net inflows, while the equally-weighted SPDR Semiconductor ETF (XSD B) saw net outflows. It’s worth noting both SOXX and SMH are market cap-weighted, with Nvidia comprising 25% of the latter ETF. That accounts for SMH’s total return of 48% versus XSD’s 10% gain year-to-date.

Several other sectors are benefiting from AI FOMO – including much-overlooked utilities. Broader fund flows turned positive in May to snap an 11-month losing streak. The Utilities Select Sector SPDR Fund (XLU A) garnered more than $700 million in net inflows. The AI power demand story is playing a pivotal role, with investors also eyeing the high dividend-paying sector as a bond proxy.

AI power needs also sparked renewed interest in nuclear. The Global X Uranium ETF (URA B-) – often looked to as a barometer in the nuclear business – saw $400 million in new money.

Investors sought to increase exposure to a bevy of bonds following a 50 basis-point drop in the 10-year Treasury yield. Fixed income flows ramped up to $62 billion this quarter, compared to $16 billion last quarter. Many are still taking a blunt approach with the iShares Core U.S. Aggregate Bond ETF (AGG A-) – which saw $5 billion in net inflows – and the Vanguard Total Bond Market ETF (BND A-). Still others are using sharper tools to bet on both ends of the curve, with short duration buying in the iShares 0-3 Month Treasury Bond ETF (SGOV A+) and heavier flows into the iShares 20+ Year Treasury Bond ETF (TLT B-), in anticipation of long rates potentially going down. High-yield plays like the iShares Broad USD High Yield Corporate Bond ETF (USHY A) also continued to gain traction.

It’s also shaping up to be a banner year for active fixed income ETFs, which have collectively reined in over $22 billion in net inflows during the second quarter. Stalwarts like the Fidelity Total Bond ETF (FBND B) and JPMorgan Ultra-Short Income ETF (JPST A) accrued net inflows exceeding $1 billion – as did the Alpha Architect 1-3 Month Box ETF (BOXX B) and the PIMCO Enhanced Short Maturity Active ETF (MINT A+). Meanwhile, global fixed income flows surged 82% in June alone to a total of $12 billion.

There’s also been strong interest in senior loan ETFs, like the Invesco Senior Loan ETF (BKLN A), and SPDR Blackstone Senior Loan ETF (SRLN A+). Collateralized loan obligations (CLOs), which are floating rate instruments with relatively low duration – were a huge driver of loan demand last year and are steadily picking up steam in 2024. The Janus Henderson AAA CLO ETF (JAAA ) just topped $10 billion in assets earlier this month and was the single most popular active ETF in the second quarter.

Bitcoin prices have tumbled well off their highs, and inflows into newly minted spot bitcoin ETFs have tapered off in kind. These funds had a thunderous start to the year – racking up roughly $12 billion in the first quarter. But inflows have sputtered to just under $3 billion in the second quarter, while the usual suspects – iShares Bitcoin Trust (IBIT ) and Fidelity Wise Origin Bitcoin Fund (FBTC ) continue to dominate.

In May, the SEC surprised the markets by announcing the approval of eight spot ether ETFs to be listed and traded on U.S. exchanges. No doubt the crypto community will wait with bated breath for the upcoming rollout this summer.

Overall, the ETF market continues to grow at a torrid pace – with more than $404 billion in net inflows, once again crossing the $9 trillion threshold and on pace for what could end up being a record year. ETF flows typically see a stronger second half of the year, though the markets must first navigate a series of global elections and geopolitical turmoil.

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