ETF boom masks uneven market: record $1.1T inflows highlight a 'gilded' rally

October marked another milestone for exchange-traded funds, as investors poured a record $171 billion into US-listed ETFs, pushing total inflows for the year to $1.116 trillion, close to a new annual record.

Global markets climbed in tandem with stocks up 2.2% and US bonds up 0.62%, bolstering the traditional 60/40 portfolio’s 14.5% year-to-date return. But State Street Investment Management’s Matthew Bartolini, CFA, CAIA, warns that today’s market exuberance might resemble the Gilded Age where a dazzling surface conceals structural imbalances.

Just as the 1880s boom was powered by railroads and steel, today’s rally is dominated by a handful of tech titans. The “Magnificent Seven” and AI-driven leaders have propelled indexes higher, but 48% of US stocks are down this year, and 70% are lagging the market. “Much of the market’s strength is concentrated in a handful of tech-focused firms,” State Street’s latest ETF Flash Flows report notes.

That narrow leadership extends globally with 40% of international stocks negative for 2025, while a surprising 76% of non-US countries have outperformed the US, led by Europe’s 13% advantage.

Bond ETFs also notched a record month in October, drawing $51 billion, with investors favoring short- and intermediate-term Treasuries as the Federal Reserve’s next move grows uncertain. Inflation-linked ETFs recorded their tenth consecutive month of inflows, reflecting ongoing hedging demand.

Meanwhile, US small-cap ETFs remain out of favor, logging their eighth month of outflows and an unprecedented $16 billion year-to-date exodus. Despite outperforming large caps in recent months and posting robust earnings growth, investor sentiment hasn’t budged, perhaps signaling anxiety over tariffs, inflation, and slowing growth.

Sector flows showed renewed enthusiasm, with $11 billion in October inflows, led by technology and materials. Defensive sectors like Utilities and Health Care also drew buyers, reversing months of outflows. On the style front, growth ETFs pulled in $17 billion, widening their lead over value to a record $57 billion gap for the year.

Alternatives and commodities continued their climb, with gold-backed ETFs surpassing their 2020 record, adding $41 billion so far in 2025.

Bartolini cautioned that today’s “gilded” strength may hide fragility beneath including stretched valuations, concentrated leadership, and policy uncertainty.

However, he sees opportunity in balance: “Having balance - or a guild of diversifying assets - may help portfolios navigate what comes next in this era of concentrated leadership, growth, and the wide range of outcomes from innovation.”