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September 21, 2012

Investors Show New Interest in Risk, but Prefer Equity ETFs to Mutual Funds

by Matthew Lemieux.

The wait is finally over, and the Federal Reserve’s latest round of monetary stimulus helped spur interest in risk assets. Still, however, investors demonstrated a clear preference for equity ETFs over mutual funds, a trend also witnessed in the August fund flows just released by Lipper.

The Federal Reserve’s announcement of a fresh round of monetary stimulus injected some excitement into U.S. financial markets over the last week, helping to push equity markets sharply higher and reviving investors’ appetite for risk. That, in turn, helped generate $16.6 billion in fresh inflows into mutual funds and exchange-traded funds (excluding money-market funds) for the week ended September 19, with $11.4 billion of that allocated to equity products, according to data released late yesterday by Lipper.

Within the equity universe, exchange-traded funds (ETFs) continued to dominate the landscape last week, with net inflows totaling $13.3 billion. Whether because they prefer the instant liquidity of ETFs or aren’t convinced that active fund managers can generate the same kind of returns, investors pulled assets out of stock mutual funds for the sixth week in a row, with net outflows totaling $1.9 billion. That brings net redemptions for the equity mutual fund business to a total of $32.3 billion for year so far.

The reluctance of investors to hold equity mutual parallels the fund flows data for the month of August released earlier this week by Lipper. Equity mutual fund outflows totaled $1.3 billion for the month (compared to a modest net inflow of $800 million during July), in spite of the fact that both the Dow Jones Industrial Average and the Nasdaq Composite Index wrapped up the month with gains. U.S. diversified equity mutual funds witnessed their 16th straight month of redemptions, with investors pulling out $13.5 billion from their coffers – the largest such withdrawal level seen since December 2011. As has been true for more than three years, withdrawals from large-cap funds dragged down the overall levels. Within the world of equity mutual funds, only one of Lipper’s dozen main categories reported net inflows: multi-cap core funds attracted a modest $200 million of net new assets in August.

In spite of the stock market rally and the clear signals from the Fed that policymakers have no intention of allow interest rates to move higher for the foreseeable future, investors clearly retain their affection for fixed income investments – at least, judging by bond fund flows. During the week ended September 19, investors injected another $5.2 billion into the group, marking its 11th straight week of inflows, with municipal debt markets accounting for $256 million of net new sales. Money market products saw net outflows of about $9.2 billion in a logical response by investors to the Fed’s announcement of QE3.

On the margin, investors may seem slightly more willing to take on additional risk – as evidenced by the flows into equity ETFs – but that doesn’t mean they are ready to abandon the relative safe haven of bond funds. For August as a whole, inflows into bond fund products (excluding ETFs), investing a net $32.4 billion into bond funds. That’s up from the $24.5 billion seen in July. Within that, there is a clear preference on the part of investors for longer-term bond funds, which pulled in 17.8 billion of those inflows. In contrast, in July, money market funds ruled the roost, pulling in $29 billion or more than half of July’s inflows. In contrast, net sales of money market funds were sharply lower in August, totaling $6.8 billion.

August was the ninth consecutive month in which ETFs saw positive flows, with net sales of $4.3 billion, bringing year to date inflows to $84 billion. Investors shifted their focus to bond ETFs during the month, with fixed income offerings making up $3.9 billion of net new sales. In contrast, diversified U.S. stock ETFs gave back nearly half of the blockbuster inflows they received in July during the month of August, with net outflows totaling $4.9 billion. Globally, investors anticipated that European Central Bank President Mario Draghi would follow through on his promise to do “whatever it takes” to save the euro, injecting a net $157 million into European-region ETFs during August.

For more information on this week’s fund flows data, please refer to Lipper’s database or this video. For insight into August’s mutual fund and ETF flows – including more details on global flows and products adopting long/short, market neutral and other strategies, you can consult this special report from Lipper.

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