Investors Pile Into ETFs at Record Pace Despite Market Turmoil - WSJ

This year’s turbulent, trade war-driven market conditions have only intensified American investors’ affinity for exchange-traded funds (ETFs). Despite unprecedented volatility since the COVID-19 pandemic, investors poured a record $437 billion into U.S. ETFs through mid-year, underscoring their resilience. If current inflows persist—historically accelerating in summer and fall—it would mark the second consecutive record year for U.S. ETF flows.

 

A key driver is the ongoing exodus from mutual funds to ETFs, which offer lower fees and tax advantages. However, this year’s surge transcends long-term trends. As markets gyrated, investors doubled down on U.S. assets, increasingly favoring ETFs as their vehicle of choice. “Selloffs are being viewed as buying opportunities,” noted Todd Rosenbluth, head of research at VettaFi.

 

ETF inflows spanned major categories, from equity and bond funds to actively managed strategies—a newer but fast-growing segment. Leading the charge is Vanguard’s S&P 500 ETF (VOO), which amassed 65 billion in net inflows this year, becoming the world’s largest ETF by assets. Last year, VOO shattered records with 116 billion in flows; it now appears poised to break its own mark by October.

 

VOO’s dominance reflects broader investor behavior. In April, when market volatility spiked to a five-year high, VOO recorded its highest monthly inflows ever. Greg Davis, Vanguard’s CEO, attributed this to investors sitting on ample cash reserves, waiting for buying opportunities. “During that turbulent period, the buy-to-sell ratio hit 5:1,” he said. “Investors recognize value when prices dip.”

 

The ETF boom has benefited giants like Vanguard and BlackRock. Larry Fink, BlackRock’s CEO, highlighted $11 trillion parked in money-market funds, a defensive play amid uncertainty. “When volatility strikes, cash remains king,” he stated at a recent Saudi-U.S. investment forum.

 

Even as the Federal Reserve raised rates to combat inflation, cash-heavy strategies persist. BlackRock’s 0-3 month Treasury ETF attracted nearly $17 billion in inflows, second only to VOO, thanks to its 4.7% trailing yield. State Street’s short-term Treasury fund also ranked among top inflows.

 

“We’re seeing defensive positioning in fixed income,” said Rosenbluth. “Investors are effectively being paid to wait.”

 

Equity funds still dominate flows, with VOO joined by peers like State Street’s S&P 500 ETF and Vanguard’s total market funds. Even actively managed strategies gained traction, including JPMorgan’s options-based dividend fund—a “boomer candy” favorite—as well as Fidelity’s push into active ETFs. Actively managed funds now capture 30% of new inflows despite holding less than 10% of industry assets.

 

Greg Friedman, Fidelity’s ETF strategy head, noted sustained demand for active strategies even during market chaos. “For 12–24 months, inflows have been strong and resilient,” he said.

 

The trend toward ETFs over mutual funds—driven by tax efficiency and liquidity—could accelerate further. Regulators are poised to approve new “ETF wraps” for existing mutual funds, allowing firms to repurpose popular strategies without costly restructuring. SEC Commissioner Mark Uyeda has prioritized the issue, with approval potentially imminent.