July 7, 2017

No Place to Hide? APs Continue to Embrace Nondomestic Equity ETFs

by Tom Roseen

For the fourth consecutive week investors were net redeemers of fund assets (including conventional funds and ETFs), this past week redeeming a net $2.4 billion from the industry. The headline numbers for the fund-flows week ended July 5, 2017, appeared to show no place for investors to hide other than in money market funds. As interest rates were nudged up on hawkish interest rate comments, actions from leading central banks, and the slight meltdown in large technology issues and energy-related stocks, investors were actually very selective in deciding where to put money to work. While they sought the relative safety of money market funds, injecting a little over $1.6 billion for the week, they were net redeemers of equity funds (-$3.3 billion), municipal bond funds (-$458 million), and taxable bond funds (-$242 million).

Since the average retail mutual fund investor is not quick to change purchasing patterns or asset allocation schemes, most of the recent flow trends can be gleaned from the behavior of authorized participants (APs, those institutional investors who create and destroy ETF shares and actually drive all the flows for ETFs). While for the third consecutive week APs fled domestic equity ETFs (-$4.4 billion for the current week), they—for the twenty-eighth consecutive week—continued to pad the coffers of nondomestic equity ETFs (+$2.3 billion). iShares Core MSCI EAFE ETF (IEFA, +$1.5 billion), Schwab International Equity ETF (SCHF, +$300 million), and iShares Core MSCI Europe ETF (IEUR, +$270 million) attracted the largest amounts of net new money of all individual nondomestic equity ETFs. At the other end of the spectrum First Trust RiverFront Dynamic Developed International ETF (RFDI, -$54 million) experienced the largest individual net redemptions, and WisdomTree Japan Hedged Equity ETF (DXJ, -$37 million) suffered the second largest net redemptions for the week.

In particular, APs were selective net purchasers of international equity ETFs (+$2.3 billion), sector-financial/banking ETFs (+$1.5 billion), and sector-energy ETFs (+$233 million) as they looked for promising opportunities or out-of-favor issues to scoop up. And despite rising interest rates (courtesy of the recent hawkish tone from the Federal Reserve, the European Central Bank, and the Bank of Canada), APs appeared to embrace corporate investment-grade debt funds (+$1.3 billion) while shunning international & global debt ETFs (-$820 million).

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