February 3, 2017

U.S. Weekly FundFlows Insight Report: Authorized Participants Pad the Coffers of Domestic Equity ETFs for the Week

by Tom Roseen

Despite the Dow Jones Industrial Average remaining above the 20,000 mark at the end of the previous trading week, investors became more risk averse after learning that Q4 GDP growth failed to reach 3%— breaking an 11-year streak—and that durable-goods orders fell in December for the second consecutive month. Concerns over the weekend about the poorly implemented immigration ban and a heavy week ahead for corporate earnings, economic data, and the Federal Reserve Board’s February policy meeting caused some investors to take their recent hard-won profits off the table, and the Dow experienced on Monday, January 30 its largest one-day percentage drop since October 2016. Nonetheless, for the second consecutive week fund investors were net purchasers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting $4.3 billion for the fund-flows week ended February 1, 2017. While investors were net redeemers of money market funds (-$12.4 billion), they were net purchasers of equity funds (+$13.8 billion), taxable bond funds (+$2.8 billion), and municipal bond funds (+$14 million).

On Friday, January 27, reports of lower-than-expected U.S. GDP and durable goods orders and some mixed earnings reports cast a pall over the markets; however, the Dow closed at a record 20,093.78. The markets were taken down a notch on Monday, January 30, as investors wrestled with President Trump’s recent policy decisions. The CBOE Volatility Index (VIX) experienced its largest one-day jump in just about five months, rising 11% on the day to 11.79 (still well below the long-term average of 20.00). Despite learning that consumer spending rose 0.5% for December (the largest December increase since 2009), investors appeared to be keeping an eye on the upcoming Fed policy meeting and the heavy releases of Q4 earnings this past week. The major indices posted their third consecutive month of plus-side returns for January, with the NASDAQ posting its best monthly return (+4.30%) since July 2016. At the end of the fund-flows week on Wednesday the market closed higher after the Federal Reserve kept interest rates steady and offered a positive view of the economy. In addition, Apple handily beat analyst expectations, and ADP reported the private sector added 246,000 jobs for January.

For the first week in three equity ETFs witnessed net inflows, attracting just a little under $15.3 billion for the flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$13.6 billion), injecting money into the group for the first week in three. For the sixth week running nondomestic equity ETFs also witnessed net inflows, this past week attracting $1.6 billion. SPDR S&P 500  ETF (+$3.8 billion), PowerShares QQQ Trust 1  (+$1.5 billion), and iShares Russell 2000 ETF (+$0.8 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum Utility Select Sector SPDR ETF (-$288 million) experienced the largest individual net redemptions, and Technology Select Sector SPDR ETF (-$209 million) suffered the second largest net redemptions for the week.

For the fifth consecutive week conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $1.5 billion. Domestic equity funds, handing back a little more than $0.9 billion, witnessed their fifth week of net outflows, and they posted a 0.90% loss on average for the flows week. Meanwhile, their nondomestic equity fund counterparts, posting a 0.52% performance loss on average for the week, also witnessed net outflows (-$523 million), suffering a second consecutive week of net redemptions. On the domestic equity side fund investors continued to shun large-cap funds (-$1.2 billion net), while on the nondomestic side they shunned global equity funds (-$0.7 billion).

For the fifth week in a row taxable bond funds (ex-ETFs) witnessed net inflows, attracting $760 million. International & global debt funds witnessed the largest net outflows of the group, handing back $274 million, while corporate high-yield funds witnessed the next largest net outflows (-$207 million). Corporate investment-grade debt funds experienced the largest net inflows, taking in slightly less than $1.5 billion for the week. With the Federal Open Market Committee’s holding rates steady as a result of this past week’s meeting and not making any material changes to its guidance, it wasn’t too surprising to see Thomson Reuters Lipper’s Treasury Inflation-Protected Bond Funds classification taking in money for the thirteenth consecutive week (+$126 million) and bank loan funds witnessing their twelfth week of net inflows, attracting some $692 million for the week. For the fourth consecutive week municipal bond funds (ex-ETFs) witnessed net inflows, this past week taking in $84 million.

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