March 1, 2018

U.S. Weekly FundFlows Insight Report: Equity Funds Take in Net New Money for the Week in Spite of Growing Inflation Fears

by Tom Roseen

For the second week in a row investors were net purchasers of fund assets (including those of conventional funds and ETFs), injecting $6.4 billion. While fund investors were net redeemers of municipal bond funds (-$591 million) and money market funds (-$7.1 billion), they padded the coffers of equity funds (+$13.3 billion) and taxable bond funds (+$854 million) for the fund-flows week ended February 28, 2018.

Investors cautiously pushed equity markets up ahead of new Federal Reserve Board Chair Jerome Powell’s testimony before Congress, only to turn tail after Powell’s testimony fueled inflation and interest rate-hike fears. However, for the fund-flows week the Dow Jones Industrial Average Price Only Index (+0.93%) and the NASDAQ Composite Price Only Index (+0.76%) posted returns in the black, while the Russell 2000 Price Only Index (-1.27%) suffered the only major decline of the U.S. broad-based indices.

Market Wrap-Up

At the beginning of the fund-flows week on Thursday, February 22, the Dow and S&P 500 benchmarks witnessed another day of volatility but ended on the plus-side as optimistic labor market data temporarily offset investors’ concerns over inflation and rising interest rates. Investors learned that initial weekly U.S. jobless claims for the prior week declined 7,000 to 222,000, below the 233,000 estimated by analysts. On Friday, February 23, stocks surged, with the Dow climbing 347.51 points as interest in bank stocks grew for the day and as the Fed’s semiannual monetary report saw broad improvement in the U.S. economy but didn’t directly suggest a change in interest rate policy. On Monday the U.S. exchanges witnessed a broad-based rally led by tech and telecom issues as Fed officials downplayed the likelihood of a fourth interest rate hike in 2018. Despite a plunge in January durable goods orders and a rise in February consumer confidence, the stock market tanked on Tuesday as Powell testified that some of the data he has seen will add to his confidence that inflation is moving up to the target. That caused many pundits to believe the Fed will take a faster approach to rate increases. According to the CME FedWatch Tool, the odds of a fourth rate hike this year grew to 33% from 20% the day before. On Wednesday, February 28, U.S. stocks declined once again, leading to the first month of negative returns in 11 for both the S&P and the Dow. Fourth quarter 2017 U.S. GDP growth was revised down to 2.5% from 2.6%, and the U.S. Energy Information Administration reported a larger-than-expected increase in domestic crude oil supplies, which pressured near-month crude oil prices.

Exchange-Traded Equity Funds                                                                      

For the first week in four equity ETFs witnessed net inflows, taking in a little more than $13.6 billion for the flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$11.6 billion), injecting money into the group also for the first week in four. For the twenty-fifth straight week nondomestic equity ETFs took in net new money, this past week $2.0 billion. SPDR S&P 500 ETF (+$6.1 billion), PowerShares QQQ Trust 1 ETF (+$2.7 billion), and iShares Core S&P 500 ETF (+$1.3 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum WisdomTree Japan Hedged Equity ETF (-$398 million) experienced the largest individual net redemptions, and First Trust Value Line Dividend Index ETF (-$288 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the second week in a row fixed income ETFs witnessed net inflows, this past week attracting some $2.4 billion. APs padded the coffers of corporate investment-grade debt ETFs (+$1.4 billion) and government-Treasury ETFs (+$609 million). iShares Core US Aggregate Bond ETF (+$1.5 billion) and iShares iBoxx $ High Yield Corporate Bond ETF (+$241 million) attracted the largest amounts of net new money of all individual fixed income ETFs, while iShares iBoxx $ Investment Grade Corporate Bond ETF (-$443 million) handed back the largest individual net redemptions for the week.

Conventional Equity Funds

For the first week in three conventional fund (ex-ETF) investors were net sellers of equity funds, redeeming $295 million. Domestic equity funds, handing back a little more than $2.2 billion, witnessed their eighth weekly net outflows in nine while posting a 0.03% loss on average. Meanwhile, their nondomestic equity fund counterparts, posting a 0.60% loss on average, witnessed their tenth consecutive week of net inflows (+$1.9 billion). On the domestic equity side fund investors shunned large-cap funds (-$1.4 billion net), while on the nondomestic equity side investors were net purchasers of international equity funds (+$2.1 billion).

Conventional Fixed Income Funds

For the second week in three taxable bond funds (ex-ETFs) witnessed net outflows, handing back $1.6 billion this past week. Fund investors padded the coffers of flexible funds (+$346 million). Corporate high-yield funds (-$981 million) witnessed the largest net redemptions for the week, bettered substantially by government-mortgage funds (-$325 million). Thomson Reuters Lipper’s Inflation-Protected Bond Funds classification witnessed its thirteenth straight week of net inflows (+$26 million this past week) as investors digested the congressional testimony by Powell. Bank loan funds (-$22 million) witnessed their second week of net redemptions in three. For the second week in three municipal bond funds (ex-ETFs) witnessed net outflows, handing back $592 million while posting a gain of 0.14% on average for the fund-flows week.

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