Fund Flows Reflect Tech-Stock Domination—Before Investors Rotated

Investment flows into mutual funds and exchange-traded funds reinforce the degree to which large technology stocks have dominated the U.S. stock market this year—that is, until this month’s well-documented rotation out of those stocks.

Technology funds attracted $4.2 billion in net inflows in the second quarter, wrapping up a first half in which when they gathered $17 billion, according to an LPL analysis of Morningstar data. Of the 10 market sectors composing the benchmark S&P 500 Index, only two others—industrials and financials—had net positive flows.

As investors focused on large, growth-oriented tech stocks, they largely ignored smaller and value-oriented stocks. Large value stocks suffered net outflows of $7.8 billion and $18.1 billion in the second quarter and first half, respectively, more than any other Morningstar category. Mid-cap value, mid-cap growth and small growth stocks all ranked in the top 10 for most net outflows in the first half.

The direction of flows reflect a U.S. stock market in which just three large tech stocks—Nvidia (NVDA), Alphabet (GOOGL) and Microsoft (MSFT)—accounted for almost half the S&P 500’s 15% gain in the first half of the year.

Those three stocks, though, have tumbled since July 10, when a rotation into small-cap stocks began in earnest as investors placed bets that smaller companies stand to benefit from interest rate cuts that are widely expected in the coming months. The Russell 2000 Index of small-cap stocks has surged 9% in the same period.

Boon for Bond Funds

Flows into equity funds have paled in comparison to those that bond funds have enjoyed. In the second quarter, fixed-income funds attracted $68.4 billion in net inflows, almost five times more than the net positive flows of $14 billion for equity funds and $7.9 billion for money market funds.

Bond funds continued benefiting both from a cautious outlook for the U.S. economy and expectations the Federal Reserve will begin cutting interest rates later this year. Intermediate core bond funds led all Morningstar categories in the first half with $69.1 billion in net inflows, and bond funds accounted for six of the top 10 categories in net positive flows.

Rate cuts would reduce yields on money market funds, whose net inflows fell in the second quarter.

ETF Flows Keep Veering Toward Active Management

Actively managed ETFs continued to gain market share versus passive ETFs in the second quarter, with investors’ focus on bond funds playing a key role.

Active ETFs had $56.8 billion of net inflows in the second quarter, pushing their total assets to $650.8 billion. Passive ETFs that track a stated index still have 10 times more assets. But active ETFs captured a third of all ETF net inflows during the quarter and now have 7.1% of all ETF assets, up 58 basis points from the end of the first quarter.

Active ETFs accounted for 35% of all net inflows into fixed-income ETFs in the second quarter. Among equity ETFs, active strategies constituted 27% of all equity ETF net inflows.