International Stock ETFs Outperform in January, but US Flows Still Pave the Way
Investors placed $38 billion into stock ETFs in a relatively mild month of flows.
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Flows into stock exchange-traded funds cooled down in January after a scorching close to 2024. Actively managed strategies, ultrashort-bond, covered-call, and crypto ETFs were the January standouts—not the traditional equity index funds that constitute the bulk of the market. But even tame stock ETF flows are immense by almost any other rubric. Investors piled roughly $38 billion into the US, international, and sector-equity cohorts in January.
January Flows Across Morningstar US Category Groups
In this article, I examine last month’s stock ETF performance and flows. I cover January returns across the bond market and flows into the ETFs that track them in a separate article, which also highlights flows across nontraditional-stock ETFs, crypto ETFs, and the top ETF providers.
US Stock ETF Performance: Strong Start in January Despite AI Shock
US stocks rolled their momentum from 2024 into a strong start to the new year. Vanguard Total Stock Market ETF
VTI
IShares S&P 500 ETF’s largest holdings were the ones that held it back in January. Take Nvidia NVDA, whose name has become synonymous with artificial intelligence because of the chips it builds to bring AI to life. The firm spiraled 17% on Jan. 27 upon news that China-backed DeepSeek’s large-language model operates far more cheaply than the incumbent US-based competitors. Nvidia fought back in the final trading days but booked a 10.3% loss for the month. Apple AAPL and Microsoft MSFT weren’t as acutely exposed to the artificial-intelligence shock, but iShares S&P 500 ETF’s first- and third-largest holdings each lost value in January as well.
The brief shock to AI-focused stocks didn’t infect the entire market. The Technology Select Sector ETF XLK was the lone State Street sector ETF that finished January in the red. Healthcare stocks led the way: The Health Care Select Sector SPDR ETF XLV paced the cohort with a 6.8% return. Medical-device companies like Abbott Laboratories ABT and Boston Scientific BSX advanced roughly 14% apiece to power the full sector. The Financial Select Sector SPDR ETF XLF was not far behind with a 6.5% January gain, as major banks J.P. Morgan, Wells Fargo, and Goldman Sachs each climbed roughly 12% on the month.
Tech’s woes—and healthcare’s and financials’ wins—help explain performance for value and growth ETFs. Roughly 40% of Vanguard Value ETF
VTV
International Stock ETF Performance: Europe Leads the Rally Past US Peers
Broad foreign-stock portfolios scraped past their US peers in January. Vanguard Total International Stock ETF VXUS ascended 3.4% in its best month since May 2024. Developed-markets stocks shook off lethargic 2024 performance to lead the charge. IShares Core MSCI EAFE ETF IEFA rallied 4.7%—more than half the 8.9% return it posted in all of 2024. IShares Core MSCI Emerging Markets ETF IEMG didn’t quite measure up but still managed a 1.5% gain.
European stocks set the tone in foreign markets. IShares Core MSCI Europe ETF IEUR rallied 6.4% in January. That resembled more of a rebound than breakout, however, as the fund slid 9.8% in the final quarter of 2024. The confluence of improving economic data, strong corporate earnings, and a deep breath following US-election-induced chaos helped European markets right the ship. Plus, nearly 10% of IShares Core MSCI Europe ETF sits in banks—one of January’s best-performing industries all over the world.
US Stock ETF Flows Highlight a Divergence Between Value and Growth
US equity funds snared roughly $28 billion in January, the cohort’s lowest monthly sum since last August. That pattern is not uncommon: Light fund flows tend to follow lucrative ends to the calendar year. The large-blend category claimed $16 billion of those inflows. That translated into about 17% of all ETF net flows on the month—their lowest share since August 2023. The venerable SPDR S&P 500 ETF Trust SPY shed $19 billion to keep a lid on the category.
Flows diverged between large-growth and large-value ETFs in January. The large-growth category collected nearly $8 billion; large value saw about $1 billion leave. That continues a trend from 2024, when the large-growth funds pulled in more money than large-value in 10 of 12 months. Heavy outflows from giant index-trackers iShares Russell 1000 Value ETF IWD ($3.4 billion outflow) and SPDR Dow Jones Industrial Average ETF Trust DIA ($2.2 billion) weighed on the large-value segment. That doesn’t mean that passive value funds are doomed to a rocky year, though. More than 60% of them finished January with inflows—those with outflows just happened to be some of the largest.
International Stock ETF Flows Went to Foreign Large-Blend Funds
A swift rebound in flows seems less likely for the international-stock cohort, which has become a tale of two groups: the foreign large-blend category and the rest. Foreign large-blend funds represent nearly half the category assets and gathered $3.6 billion in January. The other 17 categories combined for about $1.8 billion of outflows on the month.
The Europe- and Japan-focused categories held their own, but funds that target stocks in China, India, or both generally fared badly. The China region and India equity categories last month bled about $700 million and $1 billion, respectively. IShares Core MSCI Emerging Markets ETF, which stashes nearly two thirds of its portfolio in those countries plus Taiwan, shed $1.4 billion by itself. These foreign-stock pockets started to fall out of favor in late 2024, a trend that only accelerated in the new year.
Sector ETF Flows Show Investors Gravitating Toward Tech and Financials
Sector-equity funds reeled in $8.5 billion in January. ETFs that target the tech and financials sectors led the way—a familiar refrain of late—hauling in roughly $4 billion apiece. Since President Donald Trump’s election last November, the promise of deregulation has powered financial stocks and, presumably, flows into the funds that target them. The technology category has been more consistent in recent years, cracking inflows in 20 of the past 24 months. Flows into this space resemble those into a more mainline, diversified category. That may tell us something about how investors view technology stocks and their role in their portfolios.
On the flip side, investors showed little interest in sectors tied to commodities. The equity energy, natural resources, and equity precious-metals categories led the sector group in outflows. The focused commodities category shed $1 billion as well.
Leveraged Stock ETFs Had Limited Opportunities to ‘Buy the Dip’
Within the “miscellaneous” category group sits the trading—leveraged equity category, home to short-term trading tools for capitalizing on perceived market dislocations, like GraniteShares 2x Long NVDA Daily ETF NVDL. The ETFs that roam this space are favorites of the “buy the dip” trading community. Over the past three years, their average monthly organic growth rate was 2% in months when the US stock market lost value and negative 0.2% when it posted gains.
So, it’s not a tremendous surprise to see the trading—leveraged equity category shed nearly $1 billion in January. But this GraniteShares ETF bucked the trend. The product, which offers double-leveraged daily exposure to Nvidia, raked in $1.6 billion on Jan. 28—the day after its muse plummeted 17%. Nvidia roared back with an 8.9% gain the very next day and helped the buy-the-dip traders make out like bandits, provided they exited the fund immediately afterward.
Looking for a Deal? Some of the Most Undervalued ETFs Target Asian Stocks
The fair value estimate for ETFs rolls up our equity analysts’ fair value estimates for individual stocks and our quantitative fair value estimates for stocks not covered by Morningstar analysts into an aggregate fair value estimate for stock ETF portfolios. Dividing an ETF’s market price by this value yields its price/fair value ratio. This ratio can point to potential bargains and areas of the market where valuations are stretched.
According to this metric, ETFs that target Asian stocks offered some of the best value at the end of January. A pair of global real estate ETFs cracked the list as well. Conversely, seven of the 10 most overvalued ETFs spun portfolios of US companies.
The 10 Most Over- and Undervalued Analyst-Rated ETFs
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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