Fund investors betting on a summer stock market swoon missed out on more gains in August as the U.S. stock market stayed hot.
Nothing, it seems, can cool stocks off. Tariff uncertainty can't do it. Nor can a slowing job market. Not even talk of a bubble or fears the Federal Reserve is losing its independence are slowing stocks down.
The bulls kept running on Wall Street in August. The S&P 500 rose 2.03%, its fourth-straight monthly gain. The benchmark stock index also made five all-time highs, according to S&P Dow Jones Indices.
U.S. diversified stock funds, many run by professional stock pickers, topped the S&P 500's monthly gain. They rose 2.87% and extended their year-to-date gain to 7.75%, according to Lipper Refinitiv data. Despite topping the broad market in August, the average U.S. equity fund still trails the S&P's 2025 gain of 10.79% through Aug. 31.
Bad News Is Good News For Stock Market
Bad news on the job front was good news for domestic stocks. U.S. stocks got an indirect lift from a weak July jobs report released in early August. That put Federal Reserve rate cuts back on the table when it meets on Sept. 16 and 17. Fed chair Jerome Powell is under pressure from President Donald Trump to reduce borrowing costs. Powell hinted of a coming interest rate cut during a late-August speech in Jackson Hole, Wyo.
"Now the market has a little tailwind behind it," said Paul Feinstein, founder, CEO, and chief investment officer at Audent Capital Partners, an advisory and investment management firm. Feinstein expects the Fed to cut rates one or two times by year's end.
Feinstein expects the market to "chug higher." And that's despite investor concerns of overvaluation in pockets of the market, continued tariff uncertainty and a weakening employment market.
On the positive side, he says, the AI trade continues to drive positive market sentiment. "You're seeing AI come in and play out in a big way," said Feinstein.
Across-The-Board Gains
All the major U.S. stock indexes finished higher in August. That lifted most types of equity mutual funds.
Small-cap stocks led the way, with the Russell 2000 up 7%. The Russell 2000 index of small stocks is up 6.1% on the year. The Dow Jones Industrial Average, which notched its first two record highs of the year in August, gained 3.2%. The Dow is up 7.05% in 2025 through August. The tech-packed Nasdaq continued to stand out with the help of its shiny new toy: the AI trade. The Nasdaq rose 1.65% and is up 11.6% on the year.
But unlike in past months, small-cap funds outpaced big-cap funds. And once-forgotten value funds posted bigger returns than their growth fund counterparts.
Vanguard Value Index (VIVAX), for example, gained 3.44% in August, outpacing Vanguard Growth Index (VIGRX), which rose 0.84%.
In a sign that investors were moving cash into market laggards, small-cap value funds gained 7.73% in August, putting it back up for the year at plus 5.32%. Small-cap growth funds posted a small gain of 3.99% in August. Similarly, large-cap value funds gained 2.98% in August vs. a skimpy 0.58% rise for large-cap growth. Invesco S&P SmallCap Pure Value ETF was the top-performing equity ETF in August, gaining 14.33%. The second biggest gainer was EA Bridgeway Omni Small-Cap Value ETF, which rallied 13.77%.
The rebound of value names and smaller-cap equities, coupled with continued strong performance from foreign stock funds and bond funds, shows the value of diversifying portfolios. It's wise to own more than just large-cap stocks or the Magnificent Seven names.
Sector Winners
Indeed, science and technology funds remained one of the year's most-consistent and top-performing sectors. They gained just 0.91% in August, inching their year-to-date gain up to 12.83%. But in a sign that investors are questioning the stock rally, the big sector winner in August was precious metals equity funds. They soared 20.7% in August and gained 79.73% for the year.
The other big sector winners were basic materials funds, up 9.72% last month and 20.71% for the year. Two so-called value sectors, health and biotechnology funds, gained 5.81%, and financial services funds rose 4.7%.
And in another sign that potential policy changes from the Trump administration can move markets, cannabis ETFs lit up. The president said he might reclassify marijuana as having a lower danger level. It's a move that many on Wall Street believe could be a game-changer for the industry. The biggest ETF sector winner was Roundhill Cannabis ETF, turning a year-to-date loss into a 42.84% gain, according to Morningstar Direct.
Betting against the market by shorting stocks was a losing bet again. Dedicated short bias funds fell 4.77% in August and are down 25.96% in 2025.
Going International
The MSCI EAFE index, which tracks stocks in developed foreign countries, again outpaced the S&P 500 in August. The foreign stock index gained 2.1% in August, edging out the S&P 500's 2.03% gain. The MSCI EAFE's 11.62% return in 2025 through August is a full percentage point better than the benchmark U.S. stock index.
That foreign stock outperformance shows up in the fund performance world. The average world equity fund gained 3.1% in August, extending its year-to-date gain to 18.68%. That plump return is more than 10 percentage points better than the average diversified U.S. stock fund's 7.75% gain.
China region funds won big. They rallied 8.32% in August. The rally, driven by attractive valuations, policy support and recognition that China's digital technology push is making it a true player in AI, has pushed China region funds up 27.6% on the year.
Of the top 20 foreign ETFs this year, No. 16 Invesco China Technology ETF was the biggest winner in August. It gained 16.2%, according to Morningstar Direct. The sixth-best performing foreign ETF, iShares MSCI China Small Cap, rallied 10.99%.
Betting On The Buffer
Investors who own bonds as a volatility buffer scored, too, in August. Core bond funds, which invest in a diversified basket of investment grade bonds, rose 1.23% in August and are now up 5.08% in 2025. With talk of the Fed cutting rates in their meeting next week for the first time since 2024, a yield north of 5% appeals to fixed-income investors.
Talk of coming Fed rate cuts also lifted U.S. Mortgage funds to a gain of 1.5% in August, putting them up 5.51% on the year.
The big trend fixed-income investors and savers will watch now is whether the Fed will go through with interest rate cuts when it meets in September. Wall Street will closely monitor what the Fed does and what it says about future monetary policy, says Bill Merz, head of capital markets research and portfolio construction at U.S. Bank Asset Management.
If the Fed cuts the interest rate, savers will see interest paid on cash accounts, such as high-yield savings accounts and certificates of deposit (CDs), decrease.
And if the Fed does cut, investors should seek higher yields by investing in a core bond fund, which invests in investment grade bonds. "This strategy offers opportunities to lock in more yield than they would otherwise get if they hung out in cash and just wait for the Fed to cut and reinvest at lower rates," Merz said.
Fixed-income investors with foreign holdings fared even better. World income funds rose 1.58% last month and are up 8.14% in 2025.
