July ETF Flows Highlights
- Active exchange-traded funds had their best month yet.
- Cryptocurrency ETFs broke their previous one-month inflow record, buoyed by strong price growth and supportive regulators.
- Investors dropped long-term bond ETFs in favor of ultrashort and high-yield.
- No relief for small-cap stock ETFs, which saw massive outflows.
- Investors piled $123 billion into exchange-traded funds in July.
Investors piled $123 billion into exchange-traded funds in July. That’s the most in any month this year and more than July 2024’s $116 billion. ETFs garnered $664 billion in the first seven months of 2025.
The table below shows June returns for a sample of Morningstar analyst-rated ETFs that represent major sections of the stock and bond markets.
Active ETFs Continue to Grow
Active ETFs brought in $44.8 billion in July, breaking their previous monthly all-time inflow record from January this year. The number of active ETFs surpassed passive ETFs in June 2025, although most investment dollars flow into passive ETFs.
Fifteen years ago, active funds made up less than 1% of the ETF market. That number was closer to 10% at the end of July. Active ETFs are slowly chipping away at passive market share, and flows keep rising. In 2015, only 3% of new money flowed to active ETFs. For the year to date, it’s closer to 37%. The chart below illustrates that change.
Not only have active ETFs conquered more market share, but newer passive ETFs are riskier. Passive ETFs launched in the past 15 years track novel indexes with increasingly fewer holdings, shorter track records, and greater tracking error relative to their category index—indicating they’re making a lot of active bets.
Record Flows for Crypto Bros
Crypto-oriented ETFs saw record-breaking inflows in July, with more than $12.2 billion entering the digital assets Morningstar Category—its strongest month on record. The digital assets category includes funds with direct or indirect exposure to crypto, by holding cryptocurrencies or holding companies that stand to benefit from crypto growth.
There are 38 US ETFs, as of July 2025, that directly hold cryptocurrencies, or spot crypto ETFs. Spot bitcoin ETFs typically dominate flows in both the digital assets category and among spot ETFs more broadly. But in July, ethereum ETFs brought in nearly as much, despite being a small fraction of the market. Bitcoin ETFs saw $6.3 billion in flows, and ethereum ETFs saw $5.5 billion. Together, that’s around 97% of July flows into the digital assets category.
The surge was aided by a friendlier regulatory environment. In a July 31 speech, Securities and Exchange Commission Chair Paul Atkins pledged to reduce barriers for digital asset products, offering clearer rules and streamlined approvals. That should drive broader adoption as investors gain confidence that the crypto market is moving out of the shadows and becoming a defined asset class.
Large asset managers like iShares can make investors feel more comfortable with crypto by opening a familiar entryway through ETFs, which removes the need to manage wallets or direct purchases. IShares Bitcoin Trust ETF IBIT and iShares Ethereum Trust ETF ETHA are the largest spot bitcoin and ethereum ETFs, respectively. Together, they hold nearly $100 billion.
Investors Swap Term Risk for Credit Risk in Their Bond ETFs
Long-term bond ETFs have suffered massive outflows this year. Redemptions of $7.2 billion, in just seven months, already surpass outflows in any previous full year. Investors have been shifting into short-term bond ETFs as concerns over new tariffs, government spending, and weak labor market data loom.
Elevated inflation fears bring expectations of higher or sustained interest rates. Locking up capital in long-term bonds exposes portfolios to greater interest rate risk. Instead, shorter-term bonds allow investors to reinvest capital sooner, at potentially higher rates. Ultrashort duration funds like Janus Henderson AAA CLO ETF JAAA saw strong inflows over the past three months, serving as a barometer for the flight toward highly liquid, low-duration instruments. Flows into the ultrashort category were over $7.5 billion, and about $2.5 billion of that new capital went to iShares 0-3 Month Treasury Bond ETF SGOV.
Term risk may be off, but appetites for credit risk remain intact. High-yield bond ETFs have posted three consecutive months of inflows, signaling investors seek yield in other corners of the market, as long-term bonds stay undesirable. IShares Broad USD High Yield Corporate Bond ETF USHY garnered more assets, $1.4 billion, than any other high-yield bond ETF in July. Its average maturity of 3.85 years and 12-month trailing yield of 7.34% gives investors credit exposure without wading into the deep end of the yield curve.
How Long Will Investors Wait for Small-Cap Stocks?
US small-cap stock ETFs have experienced heavy withdrawals this year. All three categories—small blend, small value, small growth—have seen more outflows in just seven months than any previous full year. IShares Russell 2000 ETF IWM lost around $9.5 billion to outflows this year so far, second only to SPDR S&P 500 ETF SPY. However, SPDR S&P 500 ETF is used heavily as a trading tool and isn’t the best barometer for flows.
Small-cap stocks were one of Eugene Fama and Kenneth French’s original rewarded risk factors. In theory, investors should be compensated for the higher risk of small-cap stocks with better returns than the market in the long-run. However, the Morningstar US Small Cap Index has underperformed both the Morningstar US Large Cap and US Large-Mid indexes over the last 20 years through July, and with greater volatility. A high-risk low-reward asset isn’t of much interest to investors, and patience is running thin. Small caps have outperformed large- and mid-cap stocks only twice in the past 10 years and have clocked significantly higher volatility every year. How long must investors wait?
One of the core challenges for small-cap companies is their reliance on borrowing. Compared with more established large-cap peers with stronger balance sheets and higher profitability, small caps often depend more heavily on debt financing to grow. With interest rates remaining high, the cost of borrowing has stunted their growth. Additionally, small-cap companies typically lack the pricing power of larger, more dominant competitors. This makes it harder for them to pass on rising input costs to customers, especially in periods of inflation.