Despite market volatility amid changes in US trade policy, investors put about $75 billion into US open-end funds and exchange-traded funds in July. Desire for diversification and general conservatism likely drove the flows, a recent theme. Bond funds led the way as 18 of the 23 taxable-bond Morningstar Categories and all national-municipal bond categories experienced inflows for the month. All US equity categories except large blend continued to experience outflows. Increased rotation into foreign assets also persisted into July.
Morningstar Category Flows Show That Investors Continue to Derisk
Amid the uncertainty surrounding markets over the past several months, investors have continued to park assets in less-volatile categories, such as intermediate core bond and ultrashort bond. Flows into the intermediate core bond category topped $20 billion for a second consecutive month, a feat that has not occurred outside of 2020 and early 2021. The past 12 months of inflows into ultrashort bond funds have stood out compared with history, and July’s inflows were consistent with this trend.
Investors Bail on Long-Term Bonds
Unlike most taxable-bond categories that have enjoyed strong flows, long-term bond outflows have been unprecedented. The category has endured five consecutive months of heavy outflows at a rate significantly higher than during 2022’s bond bear market. This current stretch also featured the two worst monthly organic growth rates over more than a decade, with July’s nearly 7% drop being the largest. Seemingly, it all started in anticipation of heightened US tariffs, with investors becoming increasingly cautious of inflation and its impacts on long-term rates. Category assets have shrunk by more than 25% since November 2024.
Investors Increase Allocations to Local-Currency Foreign Debt
Diversification into non-US assets has been a common theme in recent months, following years of US outperformance. This has been particularly prevalent with currency exposures, with more US investors moving to global bond (unhedged) and emerging-markets local-currency bond funds. Investor flows into these categories correlate well with the US dollar’s strength. A weakening US dollar helped drive the most pronounced and consistent inflows into both categories in years. Both categories had seen assets shrink fairly consistently since 2013.
Stock Investors Have Also Moved Abroad
International-equity funds continued to attract more flows than US equity funds for the third month in a row. US funds saw outflows of more than $23 billion in July, with all categories in the red except large blend, compared with inflows of more than $11 billion for their international counterparts. Three-month rolling averages, shown below, smooth monthly movements and highlight the reversal investors have made here, likely driven in part by performance. The Morningstar Global Markets ex-US Index rose 17.3% in 2025 through July, easily outpacing the Morningstar US Large-Mid Cap Index’s 8.8% increase.
Leveraged Equity and Inverse Equity Flows Suggest Negative Sentiment
Leveraged equity funds saw net redemptions over the past three months, while inverse equity funds had inflows. The difference between the two can serve as a barometer of investor sentiment, with positive values showing bullishness and negative ones fear. This measure was at a three-year low in July, suggesting a deteriorating view of US equities, especially tech stocks. Most of the largest leveraged fund outflows were from technology-focused funds, while inflows were largest in ProShares UltraPro Short QQQ SQQQ, which is a triple bet against the tech-heavy Nasdaq-100.
Another Record Month of Inflows for Derivative-Income Funds
Following record inflows into derivative-income category funds in May, July’s net inflow of over $7.5 billion set another monthly record. Despite the consistently growing asset base, the category’s momentum isn’t slowing down: Its 5.3% organic growth rate in July was its highest since February 2023. Covered-call strategies make up a large portion of these funds, and their popularity has persisted as more investors continue to look for downside protection.
This article is adapted from the Morningstar Direct US Asset Flows Commentary for June 2025. Download the full report here.