Why Investors Are Shunning US Stock ETFs This Year

Why Investors Are Shunning US Stock ETFs This Year

Investors pulled money out of equity ETFs during the first quarter, even as stocks soared.

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

Exchange-traded fund investors have no interest in U.S. stocks this year. In what is a highly unusual phenomenon, investors pulled money out of U.S. equity ETFs during the first quarter, even as U.S. stocks soared.  

According to etf.com’s tally of first-quarter fund flows, $76.9 billion went into U.S.-listed ETFs overall, with most of that going to U.S. fixed income ETFs and international equity ETFs. 

But puzzlingly, investors took a net $2.9 billion out of U.S. stock funds in a quarter in which stocks rallied broadly. The S&P 500 gained 7.5%, while the Nasdaq-100 jumped 20.8% in Q1. 

Highlighting just how unusual these outflows are, full-year inflows for U.S. equity ETFs averaged $236 billion over the past five years. They even registered inflows during the pandemic-fueled market collapse of early 2020 (in fact, they had inflows in every month of 2020).  


YearInflows/Outflows ($B)
2023 (YTD)-2.9


That raises the obvious question, why are investors suddenly avoiding U.S. stock ETFs this year? 

Pessimism Abounds  

One clue comes from a recent survey from Bank of America that shows fund managers haven’t been this pessimistic about U.S. stocks in years. Another survey that measures sentiment among retail investors tells a similar story: They’re really down on U.S. stocks. 

But counterintuitively, when most investors are bearish, that often spells good news for markets. If most investors have already positioned themselves conservatively, then just a little bit of buying can lead to big gains.  

That could explain some of what’s going on with ETF flows. ETF investors could be bearish on stocks so they’re shunning stock ETFs, but there could be just enough buying from other corners of the market to support a nice rally in stocks.  

Inflows For Fixed Income ETFs 

Another potential explanation comes from where investors are putting their money in ETFs.  

If you look at the list of top asset gatherers this year, funds like the iShares 7-10 Year Treasury Bond ETF (IEF), the iShares 20+ Year Treasury Bond ETF (TLT), the iShares 0-3 Month Treasury Bond ETF (SGOV) and the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) are dominating. 

Each of those ETFs has pulled in at least $3 billion this year, suggesting investors are finding the safety and yield of Treasury bonds attractive in the current environment. 

But the inflows for Treasury ETFs understate how much demand there has been for low-risk yield. 

Since the start of the year, an incredible $463 billion has entered U.S. money market funds, more than 10x the $43.8 billion that’s gone into U.S. fixed income ETFs. 

At $5.2 trillion, assets in money market funds have increased by a whopping 10% just since the start of the year, according to data from the Investment Company Institute. 

Sea Change 

Government money market funds are effectively risk free, with a similar risk/reward profile as T-bill ETFs like SGOV and BIL. 

It’s hard to disentangle how much of the surge of assets into money market funds is a result of depositors seeking a safer alternative to regional banks in the wake of Silicon Valley Bank’s collapse and how much of it is depositors simply looking for higher yields than they can get with their bank accounts. 

In either case, money is stampeding into these funds, many of which are offering yields close to 5%, the highest level in 15 years. 

Combine the fact that investors are the most pessimistic they’ve been in years, with the highest yields on money market funds in years, and it goes a long way toward explaining the lack of interest in equity ETFs.  


Email Sumit Roy at [email protected] or follow him on Twitter @ sumitroy2           

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.