Long-term US open-end and exchange-traded funds had a better showing in February 2025 than in January, taking in $78 billion versus about $40 billion. But dollars largely flowed to taxable-bond and nontraditional-equity funds. Five of the 10 category groups suffered outflows, including two of the three traditional equity groups, suggesting investors remain somewhat cautious.
Inflows Abound for Taxable-Bond Funds
Taxable-bond funds hauled in $55 billion in February, as 21 of the 23 Morningstar Categories in this group scored inflows on the month. Widespread inflows are hardly a new development. Over the past 12 months, bond categories have taken in money regardless of their time horizon, credit risk, or currency. And bonds have rewarded investors of late: The Morningstar US Core Bond Index climbed 2.2% in February, while major US stock indexes fell.
ETFs Power Record Ultrashort Bond Inflows
Ultrashort-bond funds followed up a stellar January with a record $16 billion of inflows in February. Investors have flocked to these funds’ conservative risk/reward profiles amid market uncertainty. Collateralized-loan-obligation active ETFs like Janus Henderson AAA CLO ETF JAAA have been a popular choice, as have indexed cash alternatives like iShares 0-3 Month Treasury Bond ETF SGOV. ETFs have taken hold of this space, growing their market share to 64% by February’s end.
Postelection Runup Sees More Signs of Reversing
US equity funds bounced back in February from January’s minor outflows, but sentiment appears weak. The category group took in $19 billion in February as flows into passive funds outpaced outflows from active funds—par for the course in most months. After enjoying a stretch of inflows beginning in November 2024, small-blend funds shed nearly $4 billion, their most since May 2022.
Gold Strikes Back in February
After investors seemingly tossed gold to the curb in favor of bitcoin, the shiny metal returned to favor in February at the expense of the digital asset. The commodities-focused category, which houses gold funds, took in $4.7 billion in February (its most since March 2022), and digital-assets funds shed $1.9 billion. Bitcoin prices plunged in February, while gold held strong.
Divergent Defenders
The rise of defined-outcome funds, which protect against a specified amount of market losses, has coincided with the collapse of risk-oriented stock funds, strategies that curb downside risk by targeting low-volatility stocks. Defined-outcome funds garnered $38 billion of inflows over the past five years. The risk-oriented cohort endured $38 billion of outflows during the same time. Flows into the two groups are not a zero-sum game, but defined-outcome funds have emerged as the defensive product of choice.
Nontraditional-Equity Funds Play Pac-Man With Investor Dollars
The nontraditional-equity category group continues to outdo itself. It collected $8.2 billion in February, setting a monthly inflow record for the third consecutive month. The derivative-income category, home to covered-call funds, reeled in nearly $6.0 billion, and defined-outcome funds absorbed $1.2 billion. Both categories offer some degree of downside protection, a trait that has accelerated their adoption over the past three months.
This article is adapted from the Morningstar Direct US Asset Flows Commentary for February 2025. Download the full report here.