August 17, 2017

U.S. Weekly FundFlows Insight Report: Saber Rattling Keeps Equity Fund Investors on the Sidelines for the Week

by Tom Roseen

Markets were pummeled at the beginning of Thomson Reuters Lipper’s fund-flows week ended Wednesday, August 16, 2017, amid continued saber rattling between the U.S. and North Korea as North Korea laid out plans to launch a missile strike on U.S. military bases in Guam. But after the war rhetoric cooled somewhat, markets bounced back, approaching record levels once again. However, nagging concerns persist for fund investors. For the fourth consecutive week investors were net purchasers of fund assets (including those of conventional funds and ETFs), injecting $9.0 billion. However, the headline numbers were slightly misleading; while investors padded the coffers of money market funds (+$13.0 billion), taxable bond funds (+$1.3 billion), and municipal bond funds (+$587 million) for the week, they were net redeemers of equity funds (-$5.9 million).

Market Wrap-Up

At the beginning of the fund-flows week all three major U.S. indices finished sharply lower on Thursday, August 10, as tensions about North Korea weakened investor optimism. The NASDAQ Composite, down 2.09% on the day, suffered its worst one-day decline since May 17, 2017. Despite an uptick in the markets on Friday, the Dow Jones Industrial Average was down 0.92% for the week, its largest one-week decline since April, and safe-haven plays gained some momentum. As geopolitical tensions cooled between the two countries over the weekend, investors took the opportunity to buy the dip on Monday, sending the Russell 2000 Index and the S&P 500 up 1.47% and 1.01%, respectively, for the day, while oil continued its recent slide. A better-than-expected July retail sales report, helped by new auto sales and the results of Amazon’s Prime Day specials, helped nudge the Dow higher on Tuesday. On Wednesday, President Trump disbanded his business advisory panels—which many believed were crucial to achieving his economic agenda. That happened after the departures of key corporate leaders following widespread criticism of Trump’s reaction to the weekend’s violence in Charlottesville, Virginia. Despite this news, investors pushed the Dow above the 22,000 mark after the release of the Federal Reserve’s July meeting minutes, which were slightly more dovish than expected.

Exchange-Traded Equity Funds

For the first week in three equity ETFs witnessed net outflows, handing back a little more than $535 million for the flows week. Authorized participants (APs) were net redeemers of domestic equity ETFs (but just to the tune of -$507 million), withdrawing money from the group for the first week in three. And for the first week in 33 nondomestic equity ETFs witnessed net outflows, this past week handing back only $28 million. Schwab U.S. Broad Market ETF (+$631 million), iShares Core S&P Total U.S. Stock Market ETF (+$623 million), and SPDR Dow Jones Industrial Average ETF (+$606 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum iShares Russell 2000 ETF (-$626 million) experienced the largest individual net redemptions, and Financial Selects Sector SPDR ETF (-$441 million) suffered the second largest net redemptions for the week.

Exchange-Traded Fixed Income Funds

For the sixth week running fixed income ETFs attracted net new money, this past week some $470 million. APs padded the coffers of flexible portfolio ETFs (+$1.0 billion) and corporate investment-grade debt ETFs (+$496 million) while turning their backs on corporate high-yield ETFs, redeeming $1.3 billion net. ProShares Short VIX Short Term Futures ETF (+$670 million) and iShares Core U.S. Aggregate Bond ETF (+$230 million) attracted the largest amounts of net new money of all individual fixed income ETFs, while iShares iBoxx $ High Yield Corporate Bond ETF (-$388 million) handed back the largest individual net redemptions for the week.

Conventional Equity Funds

For the eighth consecutive week conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $5.4 billion. Domestic equity funds, handing back a little more than $5.1 billion, witnessed their thirty-third week of net outflows while posting a 0.33% negative return on average for the flows week. Meanwhile, their nondomestic equity fund counterparts, posting a 0.24% negative return on average, witnessed net outflows (-$229 million) for the first week in three. On the domestic equity side fund investors shunned large-cap funds (-$3.0 billion net) and small-cap funds (-$878 million net), while on the nondomestic side they were net redeemers of global equity funds (-$248 million).

Conventional Fixed Income Funds

For the second consecutive week taxable bond funds (ex-ETFs) witnessed net inflows, taking in $846 million. Corporate investment-grade debt funds had the largest net inflows of the group, taking in $1.9 billion (for their eleventh consecutive week of net inflows). Corporate high-yield debt funds (-$935 million) witnessed the largest net redemptions for the week, bettered by balanced funds (-$343 million). Lipper’s Inflation-Protected Bond Funds classification witnessed its forty-first consecutive week of net inflows (although taking in just $5 million this past week) after the Fed’s dovish comments, and bank loan funds (+$61 million) took in net new money for the first week in three. For the fifth consecutive week municipal bond funds (ex-ETFs) witnessed net inflows, taking in $487 million despite suffering a small performance decline (-0.04%) for the flows week.

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