U.S.-listed ETFs attracted a record $165 billion in January, the best opening month ever, according to the latest ETF Flash Flows report from State Street Investment Management, cited by ETF Express. But investors weren't YOLO-ing into growth. Rather, ETF flows suggest a market that is quietly reasserting its dominance over risk, duration, and geography in the face of an uncertain macro and rate environment.
Non-U.S. equity ETFs, for example, attracted a record $60 billion, easily outpacing the $38 billion that flowed into U.S. equity ETFs, State Street Investment Management found. Emerging market ETFs attracted $21 billion, indicating a renewed interest in global growth exposure that isn't solely dependent on the stretched U.S. growth story.
Meanwhile, U.S. small-cap ETFs suffered $4 billion in outflows, indicating a degree of investor wariness over domestically focused and rate-sensitive parts of the market. This suggests concerns over the durability of U.S. growth and financing conditions. One such fund is the iShares Russell 2000 ETF (NYSE:IWM), which saw almost $4 billion in outflows, per ETFDb.
Cyclicals In, Small Caps Out
Sector ETFs saw a record $18 billion in inflows, with near-total participation from cyclical sectors, which took in $19 billion. Investors showed a preference for economically sensitive sector exposures. A few such funds are the Industrial Select Sector SPDR Fund (NYSE:XLI), Financial Select Sector SPDR Fund (NYSE:XLF), and Energy Select Sector SPDR Fund (NYSE:XLE), which offer growth exposure while mitigating high-duration equity risk. XLI pulled in almost $700 million, whereas XLF and XLE attracted $3.5 billion and $2.7 billion, respectively, per data collected by ETFDb.
The cyclical sector bias, in combination with small-cap outflows, indicates that investors are selectively expressing macro views rather than taking general risk.
Fixed income ETFs saw a record $56 billion in inflows, with flows evenly split between low-cost bond ETFs, which took in a record $25 billion, and actively managed bond ETFs, which took in $27 billion. Credit-oriented ETFs saw $11 billion in inflows.
By contrast, long-term bond ETFs saw $3 billion in outflows, while inflation-linked bond ETFs broke a 12-month streak of inflows, reflecting investor aversion to making directional rate and inflation views.
Thematic ETFs saw $4 billion in inflows, led by Robotics & AI and Smart Cities, which comprised 60% of thematic fund inflows. Funds such as the Global X Robotics & Artificial Intelligence ETF (NASDAQ:BOTZ) benefited as investors leaned toward productivity and infrastructure-linked themes.
January's ETF surge wasn't about chasing returns — it was about controlling emotions.
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