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U.S. Fund Flows Cool Down in September

Investors press pause as markets turn south.

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

Long-term mutual funds and exchange-traded funds collected $58 billion in September 2021, their lowest intake since October 2020 when they gathered $15 billion. Still, they've experienced inflows in 18 consecutive months dating to April 2020, representing a whopping $1.4 trillion. Passively managed strategies took in about $48 billion in September, while their active counterparts collected $10 billion.

Investor interest receded across a range of asset classes in a month of weak investment returns for many equity and fixed-income markets. U.S. equity funds suffered the greatest outflows in September among U.S. category groups, shedding $7.4 billion. They have cooled off meaningfully since their record $54 billion intake in March 2021, collecting just $19.6 billion in the subsequent six months. Consistent with the broader shift in favor of index-tracking U.S. equity strategies, passive U.S. equity funds gathered $12.5 billion in September, while active funds bled $20.0 billion.

Large-growth and mid-cap growth funds posted the two greatest outflows within the group, shedding $10.1 billion and $2.5 billion, respectively. Large-, mid-, and small-blend funds were the lone bright spots as they contain many of the category group's most prominent passive funds, such as Vanguard 500 Index VFINX and iShares Core S&P Small-Cap ETF IJR, which continued to gather assets at a strong pace. Large-blend funds took in $2.9 billion, followed by small-blend's $2.3 billion inflow, and mid-cap blend's $1.0 billion intake.

Even the red-hot international-equity category group took a step back in September. After gathering an average of $24 billion through the first eight months of the year, those funds took in just $9.8 billion in September. However, considering that U.S. equity and sector-equity funds experienced outflows, investors still appear to prefer foreign stocks.

Sector-equity funds shed $750 million in September. They have still gathered $83 billion so far in 2021, much more than their $56 billion intake in all of 2020. Real estate and equity energy funds gathered $3.4 billion and $1.8 billion in September, respectively, to lead all sector-equity categories.

While demand for equity funds has ebbed and flowed in 2021, interest in those with a focus on sustainability has been consistently strong. Funds with sustainability mandates incorporated into their prospectuses, as measured by Morningstar, gathered $3.8 billion in September and have enjoyed inflows in each of the past 12 months. Sustainable U.S. equity funds gathered $1.6 billion in September, bringing their year-to-date haul to $25.7 billion, equal to more than half the inflows into U.S. equity funds without an explicit focus on sustainability, which collectively represent an asset base over 60 times as large.

Sustainable funds in other market segments have gained traction, too. As of September, those within the international-equity and sector-equity category groups posted impressive trailing 12-month organic growth rates of 57% and 122%, respectively. IShares ESG Aware MSCI EAFE ETF ESGD took in $2.8 billion over that stretch, tops among sustainable international-equity funds, while iShares Global Clean Energy ETF ICLN led all sustainable sector-equity funds with a $4.8 billion intake.

Taxable-bond funds stood out in an otherwise tepid month of flows. Their $40 billion haul represented 70% of all long-term net flows in September. Their year-to-date intake of $464 billion more than doubled the next-closest, international-equity funds' $203 billion. While investors have poured more money into taxable-bond funds than any other category group for six consecutive months, the pace of inflows has slowed since earlier in the year when they ranged from $50 billion to $80 billion from January through April.

Trends within the taxable-bond space suggest that interest rates and inflation remain top of mind for investors. Federal Reserve Chair Jerome Powell may have added fuel to the fire when he indicated in September that the Fed could start to taper purchases in November and raise interest rates next year. Short-term bond funds, which stand to lose less when interest rates rise, led all taxable-bond funds by gathering $7.1 billion in September, headlined by Vanguard Short-Term Bond Index's VBISX $1.5 billion take. Bank-loan funds--another relative safe haven in rising rate environments--added $3.2 billion, their 10th consecutive month of inflows. Inflation-protected bond funds extended their even more impressive streak of positive flows to 17 months after collecting $5.6 billion in September.

Vanguard collected $19.8 billion in September, which marked its lowest monthly inflow of the year but still led all fund families for the 10th consecutive month. The firm's prolific lineup of index funds represented the vast majority of September's haul and has now claimed over 90% of the firm's inflows year to date. Fidelity and iShares received similar boosts from their index rosters. They saw the second- and third-most inflows, respectively, with over $9 billion apiece in September.

J.P. Morgan took in $2.5 billion, marking its 18th consecutive month of inflows dating to April 2020. The firm has enjoyed widespread success across the equity, fixed-income, and alternative asset classes, standing out in an otherwise difficult environment for firms similarly focused on active management.

Note: The figures in this report were compiled on Oct. 13, 2021, and reflect only the funds that had reported net assets by that date. Permanent Portfolio had not reported. Morningstar Direct clients can download the full report here.

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