Core Insights - The fixed income ETF market has seen significant inflows, surpassing $325 billion as of mid-October, indicating strong investor interest [1] - Market uncertainty is prevalent, particularly regarding interest rates, with a high probability of two rate cuts by the Fed before 2026 [2][3] - Municipal bonds (munis) are attracting investors due to their tax-free income and low default rates, making them an appealing option in the current market [4][5] Fixed Income Market Trends - The fixed income ETF market is experiencing record inflows, suggesting a shift in investor preferences [6][7] - Northern Trust's muni funds offer competitive expense ratios, with each fund priced at five basis points, which is significantly lower than the segment average [5] - The concept of "flippening" is introduced, predicting that fixed income ETFs will eventually surpass equity ETFs in assets over the next five to ten years [7] Municipal Bonds - Muni ETFs are benefiting from attractive yields and strong credit fundamentals, with federal tax-free income being a primary draw for investors [3][4] - Northern Trust offers three muni funds that cover the full yield curve, catering to different investment horizons [6] - The low default rates in the muni market further enhance their appeal to investors seeking stable returns [4]

Core Insights - September witnessed significant bond ETF inflows, totaling $39 billion, bringing year-to-date flows to $299 billion, nearing the all-time record of $303 billion set in 2024 [2] - All bond sectors experienced inflows, with the aggregate bond segment leading at 98% of total flows, driven by low-cost passive strategies and interest in actively managed bond ETFs [2] - Short- and intermediate-term government bond ETFs attracted 86% of September's inflows, indicating a consistent preference for these maturities over long-term bonds [3][4] Fixed Income Trends - Investor sentiment towards long-term government bonds remains cautious due to volatility and concerns regarding Fed independence and rising deficits, making intermediate bonds more appealing [4] - Target maturity ETFs also reflected a preference for shorter and intermediate maturities, with $1.6 billion in inflows, indicating a structural aversion to long-dated exposures [5] - Credit-related sectors saw $5.8 billion in net inflows, with year-to-date totals exceeding $50 billion, despite tight spreads in investment-grade and high-yield categories [6] Strategic Insights for Advisors - The data indicates that investors are repositioning rather than retreating, favoring short and intermediate fixed income, selective credit use for income, and real assets like gold for hedging [7] - The intermediate part of the bond market may provide the best yield and risk management balance, especially in a steepening but historically flat yield curve environment [8] - Investors are utilizing ETFs for tactical allocation and risk management, adapting to a changing economic landscape [9]

Market Overview - August was a surprisingly steady month for markets despite inflation concerns and trade tensions, with investors focusing on solid corporate earnings and potential Fed rate cuts [1] ETF Inflows - ETFs attracted a record-breaking $118 billion in net new assets in August, more than three times the historical average of $36 billion, indicating a shift in investor behavior towards liquidity and diversification [2] - A significant portion of ETF inflows was directed towards fixed income, with $13 billion into investment-grade corporate bond ETFs and $17 billion into active bond ETFs, marking the highest inflows on record [4][5] Fixed Income Trends - Fixed income ETFs saw elevated interest, particularly in investment-grade corporate bonds and short- to intermediate-duration government bonds, reflecting a preference for higher-quality debt instruments [3][5] - Inflation-linked bond ETFs attracted $1 billion in new flows, marking the eighth consecutive month of inflows, indicating persistent investor concerns about inflation [6] Gold ETFs - Gold ETFs experienced substantial inflows driven by renewed inflationary concerns and expectations of earlier-than-anticipated policy easing by central banks, reinforcing gold's status as an inflation hedge [7] U.S. Equities Valuation - U.S. equities faced valuation headwinds, with the S&P 500's earnings yield dropping to 3.7%, below the cash yield of 4.22% from short-term U.S. Treasuries, suggesting potential overvaluation [8][9] International Equities - Non-U.S. equities are yielding nearly twice as much as U.S. counterparts and have outperformed U.S. markets by nearly 10% YTD, the largest performance gap since 2009, driven by a weaker U.S. dollar and easing monetary policy abroad [10][11][12] Fed Policy Outlook - The Federal Reserve is at a critical juncture, with markets assigning an 88% probability of a rate cut at the next meeting, while September is historically the weakest month for equity performance [13][14] Investor Positioning - There is a discernible tilt towards cyclical sectors like industrials and technology, with growth-oriented equity strategies receiving twice the inflows of value-based strategies, indicating a renewed appetite for companies with strong earnings momentum [15]

Investment Rating - The report indicates a broad-based buying trend across various client groups and sectors, with a particular emphasis on institutional-led buying [1][11][19]. Core Insights - Financials experienced significant inflows, marking the fourth-largest since 2008 and the largest since February, with a notable increase in institutional client purchases [3][11][14]. - Clients showed a preference for growth over value, particularly in the technology sector, which outperformed most other sectors [3][11]. - The report highlights a shift in client behavior, with private clients becoming net buyers for the fifth consecutive week, contrasting with institutional clients who have been net sellers post-crisis [9][19]. Summary by Relevant Sections Client Flows - Institutional clients were the biggest net sellers post-crisis, while private clients have recently turned net buyers [7][9]. - Hedge funds showed small net buying activity after a previous selling trend, while corporate buybacks have slightly accelerated but remain below typical seasonal levels [11][19]. Sector Performance - Financials saw the largest inflows, followed by Health Care, Industrials, and Energy, while Communication Services experienced the largest outflows [11][16]. - Cyclicals recorded their biggest weekly inflows since January 2019, indicating a strong interest in these sectors [11][14]. Market Capitalization - All market cap segments (large, mid, and small caps) saw inflows, with large caps leading the way [22][26]. - The report notes that clients sold equity ETFs for the first time in nine weeks, with outflows across various sectors, particularly in Staples and Real Estate [11][19]. ETF Trends - Technology ETFs had the strongest inflows, while Consumer Staples ETFs faced significant outflows [29][30]. - The report provides a detailed breakdown of ETF flows, indicating a preference for mid-cap and broad market ETFs over large and small-cap ETFs [32][34].

Investment Rating - The report upgrades the Energy sector to overweight amid record neglect and highlights potential benefits from provisions for domestic manufacturers in the tax bill [10][11][12]. Core Insights - Institutional clients have been the biggest net sellers of US equities, while private clients have returned to buying, marking a significant shift in client behavior [10][11][12]. - Energy stocks have seen the longest recent buying streak, with net buying for the last six weeks, contrasting with significant outflows in the Technology sector [10][11][12]. - The report notes that clients sold US equities for the first time in five weeks, primarily driven by institutional and hedge fund selling, while retail clients continued to buy [10][11][12]. Client Flow Trends - Institutional clients sold a net of $2.59 billion in equities last week, while private clients bought $0.84 billion [10][11][12]. - Hedge funds were net sellers for the first time in three weeks, with a total outflow of $1.48 billion [10][11][12]. - Retail clients have been net buyers in 24 of the past 25 weeks, indicating strong retail interest in equities [10][11][12]. Sector Performance - The Technology sector experienced the largest outflows, with net selling of $1.79 billion, while the Energy sector saw inflows of $0.32 billion [10][11][12]. - Health Care and Real Estate also faced significant selling pressure, while Communication Services ETFs recorded the biggest inflows [10][11][12]. ETF Trends - Clients sold equity ETFs for the first time in five weeks, with a notable shift from Blend/Growth ETFs to Value ETFs [10][11][12]. - Large-cap ETFs saw inflows, while Small/Mid-cap and Broad Market ETFs experienced outflows [10][11][12]. Market Capitalization Insights - Large-cap stocks saw significant outflows of $1.92 billion, while Small and Mid-cap stocks recorded inflows [10][11][12]. - The report indicates a trend where institutional clients are favoring Mid-caps over Large-caps [10][11][12].