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CONTRIBUTORS

Marcus Weyerer, CFA

Director of ETF Investment Strategy EMEA
Franklin Templeton ETFs

Markets were nervous in October, but exchange-traded fund (ETF) investors were not. Flows stayed largely in line with their trends. The surprises were concentrated in a few country-specific stories, above all Brazil. The data also shows a continued structural shift toward active ETFs.

A Calm Month Overall—Despite Market Volatility

We created a proprietary ETF Flow Surprise Indicator* to estimate and track monthly flows against their own history in either direction. In October, the indicator rose to about 0.7 standard deviations (σ).1 That is still among its lowest readings in two years and sits below its rolling median over two years (~0.9 σ). Only three of the 31 categories tracked moved by more than ±1.5 standard deviations from trend. ETF investors were neither retreating nor panicking. That stands in contrast to elevated market volatility, with the Cboe Volatility Index (VIX), often called Wall Street's “fear gauge,”2 touching 20% by mid-October (up from ~15% through July to September).

It also speaks of calm in the face of sharp rotations under the hood, as semiconductor firms and so-called neoclouds (companies that own or lease data centres, fill them with AI servers and sell the computing power to big tech, trading firms and AI startups) had one of their toughest months in recent memory.

Exhibit 1: ETF Flow Surprise Indicator: October Remained Largely In-Trend

Sources: Bloomberg, Franklin Templeton ETF Investment Strategy. As of October 2026.

Leaders and Laggards

Among the categories we track, growth equity showed the strongest momentum, up 4.0σ month-on-month, with US$46.9 billion of total net inflows—roughly US$10 billion more than the record set in July, and against a flat September. US-listed ETFs drew around half of net new money, with ETFs listed in Europe collecting just over US$3 billion, and the remainder coming primarily from Asia. The strength in growth-focused ETFs suggests many investors—at least for now—have continued to lean into risk even as the AI trade wobbled. The MSCI USA Growth Index shed 5.4% in October, compared with a gain of 3.5% in its value pendant.3 While the overall technology and semiconductor exposure in growth strategies is expectedly higher than in value strategies, it is worth noting that several high-profile names, like Micron, Intel and Texas Instruments, are currently constituents of the MSCI USA Value Index.4

Japan (+1.7σ), large-cap (+1.3σ) and Taiwan (+1.3σ) ETFs also saw flows above trend. South Korea recovered to trend, with momentum up 1.5σ. At the other end, sector-focused funds such as utilities (−1.8σ) and industrials (−0.7σ) lagged, as did ultra-low duration fixed income (−0.8σ). Long-duration categories (+0.7σ) saw stronger demand than ultra-low duration funds. Sector ETF flows overall were unremarkable or weak. Single-country ETFs were standouts in October.

Brazil: An Election and Two Surprises

Brazil ETFs took in a record US$4.5 billion in October. This came despite the fact that investors were caught on the wrong foot twice in the same month. During first round election results, Flávio Bolsonaro, the right-wing challenger, unexpectedly outperformed incumbent President Lula da Silva of the left-wing Workers’ Party. That triggered 15 consecutive days of net inflows. When Lula prevailed during the runoff later in October, the flows reversed sharply alongside equity prices but quickly subsided. Brazil ETFs finished the month just US$500 million below the intra-month peak.

Exhibit 2: Brazil ETFs Saw Record Inflows in October (US$ mln)

Sources: Bloomberg, Franklin Templeton ETF Investment Strategy. As of October 2026.

Exhibit 3: Brazil ETFs Daily Net Flows (US$ mln)

Sources: Bloomberg, Franklin Templeton ETF Investment Strategy. As of October 2026.

Lula is a known quantity in Brazilian politics, but he now faces the most conservative Congress since the return to democracy. For investors with a longer horizon, a selloff driven by positioning and political labels, rather than a change in fundamentals, can be an attractive entry point as we recently discussed in “Brazil After the Vote.”

In our view, a single-country ETF makes it practical to scale in allocation gradually and add around those events instead of trying to call the bottom. They are also a direct, low-cost way to express a country view.

Active ETFs Keep Gaining Share

In the United States, active ETFs now account for about 34% of ETF flows on a six-month rolling basis. That compares with about 7% in 2019, the year the ETF Rule took effect.5 Cumulative US active flows since 2019 have reached US$1.5 trillion. In EMEA (Europe, the Middle East and Africa), the share is lower, at about 9% of flows, but is rising fast. Cumulative active ETF flows in Europe have passed US$100 billion.6

What It Means for Investors

  1. Country views are where flows surprise. October's biggest moves were driven by country-specific events, not by a broad change in risk appetite.
  2. Investors are steady, not in retreat. Flows stayed in line with trend, and breadth of unusual flows was narrow.
  3. Active ETFs are moving into the mainstream, particularly in the United States, with EMEA following.

*The indicator currently covers 31 major ETF categories, each averaging at least US$1 billion in absolute monthly net flows over the past 12 months. For each category, we compare monthly global flows with a rolling 24-month trend and standardise the deviation. The indicator is the equally weighted average of the absolute standardised surprises, capped at 3σ.

Endnotes

  1. σ (sigma) is the symbol for standard deviation, a measure of how far flows are from their usual trend. A reading of +1σ means a category’s flows were one standard deviation above its 24-month trend; −1σ means one below. The headline indicator ignores direction, so it only shows how unusual flows were, not whether they were high or low.
  2. The CBOE Volatility Index (VIX) is a leading measure of the stock market's expectation of volatility based on S&P 500 index options.
  3. The MSCI USA Growth Index captures large- and mid-cap securities exhibiting overall growth style characteristics in the United States. The growth investment style characteristics for index construction are defined using five variables: long-term forward earnings per share (EPS) growth rate, short-term forward EPS growth rate, current internal growth rate, long-term historical EPS growth trend, and long-term historical sales per share growth trend. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses and sales charges. Past performance is not an indicator or guarantee of future results. Important data provider notices and terms available at www.franklintempletondatasources.com.
  4. The MSCI USA Value Index captures large- and mid-cap US securities exhibiting overall value style characteristics. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield. Important data provider notices and terms available at www.franklintempletondatasources.com.
  5. Source: Bloomberg. As of October 2026. The ETF Rule (SEC Rule 6c‑11) creates a standardized framework allowing most open‑end, fully transparent ETFs to operate without obtaining individual exemptive orders, provided they meet conditions such as daily portfolio disclosure and specific creation/redemption procedures.
  6. Source: Bloomberg. As of October 2026.

 

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