Investors Fled US Equity Funds in September. Here’s Where They Put Their Money Instead

Long-term US funds accumulated less than $27 billion in September, their lowest total since an April 2025 outflow, ending a five-month streak of inflows over $100 billion. Taxable-bond funds carried inflows once again, while US equity funds experienced their largest outflow since January. Higher interest rates, inflation concerns, and rich valuations likely drove conservative-allocation decisions in September.

Ultrashort Bond Funds Stay Hot, The Rest of Taxable-Bond Funds Do Not

Taxable-bond funds brought in an underwhelming $37 billion in September, the second-lowest figure since the tariff-driven outflows of April 2025. Ultrashort bond funds continued their hot streak, raking in $21 billion for the month—the second-largest figure in history, trailing only March 2026’s intake. With heightened inflation and rising rates, many investors leaned into these funds, which carry less interest rate risk.

Increased Uncertainty Drives Investors Out of Corporate Bonds

Amid rising rates, high-yield and corporate bond categories experienced the largest outflows across the taxable-bond category group as investors pulled $5 billion and $4 billion from these credit-sensitive categories, respectively. High-yield bonds were also hurt by significant spread widening in September. This wasn’t the case for all corporate-backed debt; bank-loan funds gathered over $1 billion during the month, their largest figure since February 2025. Investors may have been persuaded to invest in these lower-quality assets because of their negligible interest rate sensitivity.

Flight to Quality in Long-Duration Bonds

Despite rising interest rates, long government funds ranked second across taxable-bond categories with $5 billion of inflows in September. Other long-duration bond categories did not share the same fortune. Heightened rate volatility especially damaged agency mortgage-backed securities, as did 30-year mortgage rates that surpassed 7%. The yield on 10-year Treasury bonds closed September at 5.29%, the highest level since 2002, rising 50 basis points in the month. As credit spreads remained tight, long-term corporate bonds were similarly out of favor.

Muni Investors Cultivate Tax-Loss Harvesting Opportunity

Municipal-bond investors rotated into low-fee exchange-traded fund offerings and out of open-end funds at a historic clip in September. Across muni categories, investors added nearly $14 billion into ETFs, the largest figure on record, while pulling $11 billion from open-end funds, the largest outflow since 2022. Rising rates led to losses in muni funds, likely presenting an opportunity for investors to rotate into cheaper ETF products without triggering meaningful capital gains. Unlike interest payments, municipal-bond capital gains are not tax-exempt.

Investors Flee US Equity Funds in September

US equity funds suffered a $32 billion outflow in September, their first since May and largest since January. The normally resilient large-blend category also saw a $6 billion outflow, its first since September 2025, while large-growth funds had the biggest outflow at $17 billion. Their opposing fortunes over the quarter saw large-blend attracting $33 billion and large-growth shedding $22 billion, with $27 billion leaving the broader category group.

International-Equity Funds Post Sixth Straight Quarterly Inflow

International-equity funds’ $2 billion inflow in September contributed to a $9 billion gathering for the quarter, their sixth straight positive quarter despite some recent weaker monthly flows. The foreign large-blend category led unsurprisingly, with a $23 billion quarterly inflow largely into passive funds, while focus-region funds aimed primarily at South Korea and Canada added $8 billion. The foreign large-growth category led net losers with a $29 billion outflow, while two other growth categories combined for $7 billion more.

Sector-Equity Funds Return to Inflows, Even As Industrials Go Off-Track

Sector-equity funds secured a small $2 billion inflow in September, contradicting an $8 billion outflow in August. Technology sector funds also returned to inflows, with a similarly sized intake as the category group. A semiconductor ETF led the category, but other top fundraisers represented a broad array of tech themes. Roundhill Memory ETF DRAM suffered the largest outflow of nearly $2 billion, tempering its high-velocity gains earlier this year. Meanwhile, industrials funds shed $1 billion, their first meaningful outflow since April 2025 and largest since May 2022.

This article is adapted from the Morningstar Direct US Asset Flows Commentary for September 2026. Download the full report here.