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Investors Return to U.S. Equity Funds in October

Flows into U.S. equities ramp up but remain subdued elsewhere.

Editor's note: This is adapted from the Morningstar Direct U.S. Asset Flows Commentary for October 2021. Download the full report here.

Long-term mutual funds and exchange-traded funds gathered $84 billion in October 2021, rebounding from their lowest intake of the year in September when they brought in just $53 billion. Passively managed strategies collected about $79 billion in October, while actively managed funds gathered just $5 billion. By investment type, ETFs mirrored passive funds' $79 billion intake, with $71 billion accruing to passive ETFs and $8 billion to active ETFs. Open-end funds took in $5 billion, driven by flows into passive strategies.

Strong U.S. equity market performance may have coaxed investors back into U.S. equity funds. After shedding $7.5 billion in September, U.S. equity funds raked in $32 billion to lead all U.S. category groups for the first time since March 2021 when they collected a record $54 billion. Large-blend funds were the clear winners, taking in $27.6 billion. Passive large-blend funds, particularly those that track the bellwether S&P 500, essentially represented all the inflows. Active large-blend funds shed $2.3 billion, though that was less than their pace of outflows for much of 2020 and the first half of 2021 when they regularly experienced monthly outflows between $3 billion and $8 billion.

International-equity fund flows dominated those of their U.S. counterparts for much of 2021--but not in October. International-equity funds gathered about $15 billion during the month, much less than U.S. equity funds' $32 billion (though slightly greater on an organic growth basis). Foreign large-blend funds took in nearly $12 billion, the most by far of any Morningstar Category within the group. Both active and passive foreign large-blend funds experienced meaningful inflows, with passive funds taking in $8.2 billion and active funds collecting $3.6 billion. While the vast majority of categories within the international-equity group have seen positive flows in 2021, world large-stock value funds are a notable exception. They've astonishingly bled assets for 46 consecutive months dating to January 2018. The heavy presence of active management in the category may explain some of the weakness.

Sector-equity funds gathered about $6 billion in October, rebounding from a $700 million outflow in September. October's intake is still a far cry from their streak of six consecutive months of inflows greater than $10 billion from November 2020 through April 2021. Financial funds collected the greatest total within the category group in October with $3.0 billion, followed by technology funds' $2.1 billion intake and real estate funds' $1.3 billion.

For the first time since March, taxable-bond funds did not lead all category groups in monthly flows. Their $22 billion haul fell well short of U.S. equity funds' October intake. Taxable-bond funds' lead in the flows standings for the year-to-date remains commanding, though. The $486 billion they have absorbed in 2021 more than doubles the next-closest competitor, international-equity funds' $214 billion.

Short-term bond funds led all Morningstar Categories in flows in September but recorded a tamer $2.2 billion inflow in October. Flows into intermediate core bond funds remained subdued as well. While their $7.7 billion inflow in October edged September's $6.8 billion, it fell well short of their 2021 high mark of $25 billion set in January. Intermediate core-plus bond funds suffered a $3.8 billion outflow in October, their first such month since April 2020. As the specter of rising interest rates looms, it's possible that investors have become wary of bond funds that don't explicitly protect from inflation.

Demand for environmental, social, and governance-related funds remained strong in October. Funds with sustainability mandates incorporated into their prospectuses, as measured by Morningstar, gathered $4.9 billion in October, bringing their trailing 12-month intake to $75 billion--good for a blistering 36.6% organic growth rate.

IShares raked in $20.2 billion in new money last month, the most among all fund families. That sum narrowly exceeded the $19.7 billion that streamed into Vanguard, whose monthly flows led all fund families for 10 consecutive months prior to October.

Even after a second-place finish, Vanguard has a commanding lead over its peers through the first 10 months of 2021. Its low-cost, broadly diversified index offerings have helped the firm accumulate over $328 billion for the year to date.

IShares and State Street Global Advisors--which join Vanguard to form the three largest ETF providers--have also racked up stellar flows with index lineups of their own. In fact, the three firms have collectively hauled in more money this year ($533 billion) than the other 25 fund flows leaders for the year to date combined ($508 billion). Indeed, the "Big 3" ETF providers have capitalized on investors' desire for low-cost index funds.

Note: A previous version of this report underestimated the trailing 12-month flows for Dimensional Fund Advisors by approximately $4.7 billion because of an error in the September flows for one fund, Dimensional World ex US Core Equity 2 ETF DFAX. DFA's total TTM estimated flows were negative $16.3 billion at the end of October rather than negative $20.5 billion. The figures in this report were compiled on Nov. 12, 2021, and reflect only the funds that had reported net assets by that date. Morningstar Direct clients can download the full report here.

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