After torrid end to second quarter, investors take a breather

The final 10 days of the second quarter were marked by missile exchanges between Israel and Iran, the passage of the new American administration’s omnibus tax and spending bill through Congress, US stock indexes hitting fresh record highs and much of Europe sweltering under record temperatures.

With the US fourth of July holiday looming and the start of the latest corporate earnings season a fortnight away, investors started July by taking the generally safe options. US Money Market Funds pulled in $53.3 billion, Dividend Equity Funds posted their 14th consecutive inflow, Physical Gold Funds extended their current inflow streak to six weeks and $11.5 billion total, and diversified Global and Global Emerging Markets (GEM) Equity Funds both enjoyed solid inflows.

Provisional data ranks US Money Market, Europe Bond and Global Equity Funds as the biggest money magnets during the second quarter, while funds exposed to assets classes that are vulnerable to slower US growth or have drawn the ire of US President Donald Trump – makers of expensive drugs, green energy, Japanese agricultural policymakers – found themselves at the bottom end of the table.

Overall, the week ending July 2 saw a net $2.2 billion flow into all Equity Funds while Alternative Funds absorbed $5.4 billion, Bond Funds $20.4 billion and Money Market Funds $56.3 billion. At the halfway point of 2025, net flows into all EPFR-tracked ETFs exceed $800 billion, keeping those vehicles on track to equal or exceed last year’s record-setting total of $1.67 trillion.

At the asset class and single country fund levels, Physical Silver Funds posted their first outflow since the first week of May, Momentum Equity Funds chalked up their 12th straight inflow and flows into Convertible Bond Funds rose their highest level since early 4Q24. Redemptions from Switzerland Money Market Funds hit a record high, Australia Equity Funds posted their biggest outflow in over 14 months and South Africa Bond Funds posted their biggest outflow since 4Q22.

 

Emerging Markets Equity Funds

July started with the diversified Global Emerging Markets (GEM) Equity Funds extending their longest inflow streak since a 10-week run ended in late October and fresh money flowing into both Latin America and EMEA Equity Funds. But that was not enough to offset the more than $3.5 billion redeemed from funds dedicated to mainland China, resulting in the 14th outflow year-to-date for all EPFR-tracked Emerging Markets Equity Funds.

Behind the headline number, EM Equity Funds with socially responsible (SRI) or environmental, social and governance (ESG) mandates recorded their biggest inflow since mid-1Q23 while EM Dividend Funds saw a five week run of inflows come to an end and redemptions from all retail share classes climbed to an 18-week high.

With the ceasefire between Israel and Iran holding and the latter not, for now, moving to close off the straits of Hormuz, EMEA Equity Funds racked up their seventh straight inflow and 10th over the past 11 weeks. Analysis of marine traffic in the Middle East by EPFR’s sister company CEIC underscores the willingness of investors and businesspeople to look past the recent fighting. In a recent note, CEIC does caution that, although “a pickup in Iranian oil shipments has occurred very recently… in the broader region, the recovery is driven in part by the base effect – i.e., weakness in last year’s comparative figures, when the wider region was arguably more dangerous for shipping.”

Investors looking to Latin America pumped more money into Brazil Equity Funds during the week ending July 2. But regional funds attracted the biggest inflows as South America continues to fly somewhat below the radar when it comes to additional US tariffs.

Asia ex-Japan Country Fund groups enjoyed mixed fortunes coming into the third quarter. India Equity funds chalked up their 13th inflow over the past 15 weeks, Korea Equity Funds posted consecutive weekly inflows for the first time since mid-April and Taiwan (Province of China) Equity Funds saw year-to-date inflows climb past the $17 billion mark.

On the other side of the ledger, China Equity Funds recorded their biggest outflow in over a month despite the squeeze on the yield of alternative assets, such as government bonds and bank products, thanks to easing measures taken to boost growth and combat deflation. Thailand Equity Funds, meanwhile, posted their 78th consecutive outflow during a week when the country’s Constitutional Court suspended Prime Minister Paetongtarn Shinawatra. The latest outflow was the biggest since late 2Q19.

 

Developed Markets Equity Funds

Flows did not follow the US stock markets’ latest scramble up a big wall of worry, with US Equity Funds starting July by posting their 10th outflow over the past three months. For the second week running, however, strong flows into Global Equity Funds kept the headline number for all EPFR-tracked Developed Markets Equity Funds in positive territory.

After several weeks in the shadow of their Global ex-US Equity Fund peers, funds with fully global mandates bounced back with inflows hitting a six-week high. Actively managed Global Equity Funds have cut their US allocations this year by an average of over 2%, with the exposure rotated to European markets, Japan and cash.

Investors do not share the enthusiasm of Global Equity Fund managers for Japan or the UK. During the week ending July 2, Japan Equity Funds tallied their fourth consecutive outflow, and sixth over the past seven weeks, as investors factor in the impact on Japanese exporters of a stronger yen and fret about the impact of food inflation on Japanese consumer confidence. Foreign domiciled funds recorded their biggest collective outflow since late March and redemptions from all retail share classes hit a level last seen in 3Q23.

Australia Equity Funds also took a hit, posting their biggest outflow in more than 14 months as retail redemptions posted their biggest total since mid-2Q16.

Flows to Europe Equity Funds went largely to the two major regional groups and Germany-mandated funds. These offset over $800 million worth of redemptions from UK Equity Funds as an underwhelming welfare reform bill rekindled fears that bond markets will drive Britain’s borrowing and debt service costs higher.

US Equity Funds recorded a modest outflow, with Mid Cap Growth Funds the biggest contributor to the overall total. Redemptions from that group hit a one year-high, with the same ETF driving the headline number this week and a year ago. American companies continue to support their share valuations through buybacks and cash takeovers, with the year-to-date total for all corporate buying now north of $900 billion.

 

Global sector, Industry and Precious Metals Funds

Ahead of the second quarter US corporate earnings season that kicks off in a fortnight, nine of the 11 EPFR-tracked Sector Fund groups recorded a net inflow with Technology, Financials and Industrials Sector Funds all taking in well over $1 billion during the latest reporting period and flows into the remaining groups averaging $300 million. Outflows were limited to Commodities and Real Estate Sector Funds.

Artificial Intelligence — a concept born in the tech sector — has rapidly evolved into a transformative force across nearly every corner of the market. While most associated with software and semiconductors, AI now plays a critical role in multiple sectors. Over the past year, corporate earnings reports have been studded with mentions of AI as businesses begin to understand the full capabilities and practicalities. The past 10 weeks for Technology Sector Funds have flip-flopped between positive and negative territory – some of which was options-led – but the subset of Artificial Intelligence Funds has seen just two outflows since mid-November.

Among the other groups attracting over $1 billion, Industrials Sector Funds pulled in a net $7.6 billion over the past 12 weeks and have only posted one outflow since the beginning of March. The latest inflows were the biggest in nearly a year.

Flow momentum in the Industrial Sector Fund universe has been especially strong for funds with exposure to defense, aerospace, and industrial automation — areas seen as long-term beneficiaries of geopolitical shifts and reshoring efforts. Fourteen Aerospace & Defense Funds have pulled in over $100 million year-to-date, all of which track a unique benchmark. Three of those funds have seen their totals reach over $1.6 billion, one of which just hit $3 billion year-to-date.

Disruptions and “disastrous” are often two words seen when reading about the US administration’s omnibus tax and spending bill’s impacts on the healthcare industry, with some estimates putting the number of Americans who will lose health insurance at 5 million. But Healthcare Sector Funds, which posted just four weeks of inflows during a 30-week stretch from late November until recently, have now chalked up three straight inflows.

The week ending July 2 saw the first outflow in three weeks for Real Estate Sector Funds – typically viewed as a “flight to safety” – with Europe Regional and US-dedicated REIT funds hit hard while Global REIT Funds fared well.

 

Bond and other Fixed Income Funds

EPFR-tracked Bond Funds kicked off the third quarter with their fourth inflow over $20 billion year-to-date. Flows into US Bond Funds climbed to a six-week high, Emerging Markets Bond Funds added to their longest inflow streak since 1H21 and Global Bond Funds absorbed fresh money for the eighth time during the past 10 weeks.

Getting yield while the getting is good was a major driver of the latest flows, with markets discounting US Federal Chairman Jerome Powell’s current stance in light of the perceived need to bolster the US economy later this year with lower interest rates.

At the asset class level, Inflation Protected Bond Funds recorded only their fourth outflow since mid-January, flows into Bank Loan and Convertible Bond Funds hit 19 and 39-week highs, respectively, and High Yield Bond Funds pulled in another $2.69 billion.

The latest flows into US Bond Funds favored funds with corporate and mixed mandates and a focus on intermediate term (4-10 years) duration debt. US Sovereign Bond Funds posted their fourth outflow over the past five weeks as investors waited for the final version of the tax and spending bill championed by US President Donald Trump. Flows into foreign domiciled funds did, however, climb to a three-month high.

Appetite for Europe Sovereign Bond Funds is also subdued, with those funds posting their biggest collective outflow since mid-March while over $3 billion flowed into European Corporate Bond Funds. At the country level, Sweden Bond Funds posted their biggest inflow in over 15 months and Italy Bond Funds set another weekly inflow record based on flows of nearly $400 million absorbed by two funds.

Although China Bond Funds were again the biggest force behind the overall total for all Emerging Markets Bond Funds, Korea-mandated funds made a significant contribution as they recorded their biggest weekly inflow since EPFR started tracking them.

 

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