exchangetraded funds built on their record year last month as they raked in a fresh 66 billion of new investor money with two thirds of 2021 in the books etfs’ yeartodate haul clocked in at over 591 billion global stock markets continued to advance despite uncertainty around the coronavirus delta variant the morningstar global markets indexa broad gauge of global equitiesadded 25 in august boosting its yeartodate return to 1564 that marked its seventh consecutive month in the black its longest such streak since it notched 15 straight positive months from november 2016–january 2018 bonds took a small step back however snapping a fourmonth winning streak of their own after sliding 015 in august the morningstar us core bond index has now lost 072 for the year to date here we’ll take a closer look at how the major asset classes performed last month where investors put their money and which corners of the market look rich and undervalued at month’s endall through the lens of etfs exhibit 1 shows july returns for a sample of morningstar analystrated etfs that serve as proxies for major asset classes investors in a blended global portfolio reaped a 123 return last month stocks returned to their role as the blended portfolio bellwether vanguard total world stock etf vt the portfolio’s stock tentpole added 226its best monthly return since april it picked up the slack for vanguard total bond market etf bnd and vanguard total international bond etf bndx which posted august losses of 019 and 043 respectively international stocks bounced back from a lackluster july to help vt’s cause ishares msci acwi ex us etf acwx advanced 145 after losing a similar amount the month prior much of the turnaround points to emergingmarkets stocks which steadied the ship and contributed solid performance last month indian stocks in particular went on a tear the msci india index jumped 1094its best monthly showing since april 2020 it was us stocks that continued to set the pace though undeterred by the specter of a covid19 resurgence at the end of august the sevenday rolling average of us reported cases had reached its highest level since january according to the centers for disease control and prevention still ishares core sp us total stock market etf itot advanced 283 last month investors’ optimism may spring from increased vaccination rates64 of us adults had received full doses at the end of augustthe fed’s recent hints that interestrate hikes remain distant on the horizon or some combination of other factors in any event stocks have marched along the morningstar us market index’s 2044 yeartodate gain is its best eightmonth stretch to start a calendar year since 1997 largecap us stocks have led the charge most recently ishares core sp 500 etf ivv climbed 302 last month while smaller sibling ishares core sp smallcap etf ijr added 191 the latter shot out of the 2021 gatesit outpaced ivv by about 13 percentage points over january and februarybut the sp 500 tracker has nearly closed the gap after several strong months ivv’s 2162 yeartodate return narrowly trailed ijr’s 2285 gain at the end of august growth and value stocks’ relative performance continued to parallel the large versus smallcap relationship vanguard growth etf’s vug added 367 in another stellar month while vanguard value etf vtv posted a 209 return many of the same economic factors that underpin large caps and small caps’ relative returns likely influence the valuegrowth story the cheaper sectors that vtv favors tend to be more sensitive to economic uncertainty for example the fund’s energy holdings like exxon mobil xom and chevron cvx slid about 4 apiece last month meanwhile the tech titans that vug favors tend to be more insulated from the economy’s currents companies like microsoft msft and apple aapl emerged from the early 2020 drawdown relatively unscathed and have continued to trek ahead as economic uncertainty has resurfaced vug now has the yeartodate upper hand over vtv 2145 gain versus 2045 after the latter carved a healthy advantage earlier this year that ishares msci usa momentum factor etf mtum led the ishares suite of singlefactor strategicbeta etfs last month seems to align with valuegrowth trends because it tends to favor fastergrowing stocks however much of the momentum fund’s 412 august return owes to its hefty allocation to financials financials stocks tend to be more popular among value funds but after mtum’s growthoriented stance stunted performance in late 2020 and early 2021 the fund raised its financials exposure to 32 from 2 at its may rebalance mtum’s pivot toward cheaper names has yielded mixed results as growth stocks have excelled but it paid off in august when financials stocks were the market’s top sector the broad us market’s stellar run has precipitated rich valuations itot traded at a 7 premium in august as measured by morningstar’s pricefair value estimate it has hovered around that premium for most of the year investors may find more attractive value overseas particularly in emergingmarkets stocks ishares core msci emerging markets etf iemg traded 13 below its fair value in augustan even wider margin than the 11 discount it registered in july that it looks even cheaper after a month of positive returns reflects increased analyst conviction in its underlying holdings stock etfs continued a prolific year in august after collecting another 50 billion last month they have claimed about three fourths of all etf flows for the year to date last year equity etfs accounted for 46 of flows growth etfs’ solid performance over the past few months has been accompanied by solid inflows us large mid and smallcap growth etfs collectively hauled in 5 billion last monthabout double that of their value counterparts they have now absorbed 17 billion in the past three months after adding only 3 billion from the start of the year through may invesco qqq trust qqqthe techheavy nasdaq100 tracker and fifthlargest etf on the marketonce again led the way it pulled in 25 billion last month cranking its trailing threemonth inflows to 9 billion the flows pendulum has decidedly swung back to growth strategies after favoring value funds for the first half of 2021 funds that reside in the us financials morningstar category collectively raked in 25 billion last month after bleeding the same amount in july despite last month’s stumble financial stock etfs have racked up the most inflows of all sector categories the 215 billion they have taken in for the year to date more than doubles the nearest contender’s haul technology funds’ 96 billion financial select sector spdr etf xlf has tallied 97 billion in flows alonethe eighthmost among all etfs this year investors’ expectations for increased interest rates may explain this rush as financial stocks tend to fare better in such environments investors could also be chasing performance financials were the secondbestperforming sector from the start of the year through august real estate and energy stocks ranked first and third and they have pulled in 79 billion and 89 billion respectively while some investors have tried to tactically allocate their sector exposures most have stuck to the script lowcost broadly diversified marketcapweighted index funds fortyfour percent of all new money flowed into the us largeblend category in august led by a pair of sp 500 trackers spdr sp 500 etf trust spy vanguard sp 500 etf voo and an even broader offering vanguard total stock market etf vti vanguard’s twoheaded monster of voo and vti has been fixed atop the flows leaderboard the tandem has jointly raked in 645 billion for the year to date that tops the 2021 inflows of all morningstar categories excluding the largeblend space in which they reside bond etfs notched another sound month of flows pulling in about 194 billion of new investment as their equity counterparts have made headlines bond etfs have quietly and consistently amassed strong flows of their own their monthly haul has ranged from 17 billion to 20 billion in each of the past five months at their current rate bond etfs are on pace to narrowly eclipse the annual flows record they set in 2020 while the fed has maintained that recent inflation is transitory and rate hikes remain in the distant future fixedincome etf investors appear skeptical following a lucrative august inflationprotected bond etfs have now pulled in more than 10 billion over the past three months shorterterm bond etfs have drawn in more money than longerterm options which are subject to greater interestrate risk the us intermediate and shortterm bond categories have each absorbed over 24 billion for the year to date while the us longterm bond category has added only 400 million vanguard’s etf lineup collected 237 billion last month while that marked its lowest monthly inflows in 2021 it was enough to extend its streak atop the etf provider flows league table to nine months at the end of july the firm’s 2311 billion yeartodate haul more than doubled its nearest competitor ishares 1198 billion despite leaking about 141 million last month wisdomtree retained its tenuous spot on the list of the 10 largest etf providers it outlasted close competitor ark invest which leaked about 11 billion last month as each etf in its eightfund lineup experienced outflows wisdomtree us quality dividend growth etf dgrw led wisdomtree’s etf lineup last month but wisdomtree emerging markets exstateowned enterprises etf xsoe has been the firm’s crown jewel this year accounting for about half of the firm’s yeartodate inflows this fund targets emergingmarkets stocks but excludes all stateowned enterprises allowing it to sidestep some of the unique governance risks that can plague emergingmarkets strategies it outstripped the msci emerging markets index by 28 percentage points annually over the five years through august 2021 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 this value by the etfs market prices yields the pricefair value ratio this ratio can point to potential bargains and areas of the market where valuations are stretched the ”undervalued” half of exhibit 6 shows funds that traded at the lowest price relative to their fair value at the end of july this month’s edition features a unique combination of chinese energy and cannabis funds kraneshares csi china internet etf kweb a 52stock portfolio of chinese internet stocks is an interesting constituent in july this fund spiraled after beijing’s regulatory crackdown affected nearly all of the portfolio’s holdings including top names alibaba baba and tencent tcehy us investors flocked to kweb as it plummeted and have continued to even after it stabilized in august after pulling 19 billion into the fund in july it added another 15 billion last month no other “undervalued” fund in exhibit 6 experienced august flows of more than 120 million in either direction while there is risk that this portfolio is chockfull of falling knives following the money reveals investor confidence in a course reversal investors hunting cheap valuations in a more diversified portfolio should likely keep their focus overseas as exhibit 7 shows emergingmarkets stock etfs dominated the ranks of the cheapest broadbased option at the end of august most of these funds zero in on international stocks that look cheap relative to their dividends or other fundamental measures of value the question becomes are these funds cheap enough to offer adequate returns for the risk they court for example schwab fundamental emerging markets large company index etf’s fnde valuecentric fundamentalweighting approach probably makes more sense in the us market it takes lofty stakes in stocks from the materials and energy sectors whose exposure to volatile commodity prices raises their risk additionally stateowned enterprises are more prominent in this portfolio than in the msci emerging markets index the fund has trailed that benchmark by 126 percentage points annually since its inception with about 15 more volatility the stocks featured in some of these portfolios may be cheap but are not cheap enough to compensate them for their risk the pricier side of exhibit 7 consists almost entirely of funds that invest in us stocks invesco sp 500 pure growth etf rpg headlines the list this fund steers decisively into fastgrowing stocks but that’s no guarantee it will outperform its large growth category index when growth is in favor indeed it trailed the russell 1000 growth index by over 45 percentage points annually over the five years through august 2021a period characterized by growth stocks’ success a smallerthanaverage marketcap orientation held this strategy back overshadowing its pronounced growth exposure this underscores the importance of evaluating etfs from all possible angles rather than trusting they will perform as they promise