February 21, 2019

U.S. Weekly FundFlows Insight Report: Despite a Good Week for the Market, Equity Funds Suffer Net Redemptions

by Tom Roseen.

For the first week in three, investors were overall net redeemers of fund assets (including those of conventional funds and ETFs), withdrawing $9.1 billion for Lipper’s fund-flows week ended February 20, 2019. Fund investors were net purchasers of taxable fixed income funds (+$3.0 billion) and municipal bond funds (+$1.5 billion), while being net redeemers of equity funds (-$1.8 billion) and money market funds (-$11.7 billion).

Market Wrap-Up

Markets generally continued their upward trek during the fund-flows week, cheering comments from a kinder, gentler Federal Reserve Board, increased optimism around a China/U.S. trade agreement, and improving economic reports. While the NASDAQ Composite Price Only Index (+0.93%) managed to string together its eighth consecutive upside session, the Russell 2000 Price Only Index (+2.51%) posted the strongest returns of the broad-based U.S. indices for the flows week, followed by the Dow Jones Industrial Average Price Only Index’s 1.61% and the S&P 500 Price Only Index’s 1.15% plus-side returns. Despite rumblings of a possible automobile tariff being placed on European exports to the U.S., investors remained engaged with overseas issues, with the Xetra DAX Total Return Index (+2.66%) and the Shanghai Composite Price Only Index (+2.01%) posting the strongest returns of the broadly followed overseas indices.

At the beginning of the Presidents’ Day shortened fund-flows week, stocks stumbled after investors learned retail sales declined 1.2% in December—their largest monthly decline since 2009—and that jobless claims from the prior week rose unexpectedly. However, the NASDAQ Composite bucked the trend, rising for the fifth day in a row, after President Donald Trump hinted he may be willing to extend the tariff truce with Beijing another 60 days. On Friday, February 15, the markets got a shot in the arm after the reports showed the February Empire State manufacturing index rose 4.9 points, beating analyst expectations, and the University of Michigan consumer sentiment index rose to 95.5 in February, beating analyst expectations of 94.

Defensive issues led the charge on Tuesday, February 19 (the U.S markets were closed on Monday in observance of the Presidents’ Day holiday), pushing the NASDAQ to a seventh consecutive winning session as investors warmed to another round of U.S./China trade talks this week in Washington. In addition to the positive news on trade talks, stocks continued to benefit from dovish Fed comments. U.S. markets continued to move higher on Wednesday after the Fed released the meeting minutes from its January policy-setting meeting in which Federal Open Market Committee members were mixed on the need for future rate hikes, but almost in total agreement to stop reducing its balance sheet later this year. The price of near-month crude oil rose during the fund-flows week.

Exchange-Traded Equity Funds

For the second week in a row, equity ETFs witnessed net inflows, taking in a little less than $1.7 billion for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$1.5 billion) for the second consecutive week. Meanwhile, nondomestic equity ETFs witnessed net inflows for the fifth week running, but they attracted only $165 million this past week. Invesco QQQ Trust 1 (QQQ, +$1.3 billion) and iShares Edge MSCI Minimum Volatility USA ETF (USMV, +$675 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR S&P 500 ETF (SPY, -$696 million) experienced the largest individual net redemptions and Consumer Discretionary Select Sector SPDR ETF (SPY, -$553 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the fourth week in a row, taxable fixed income ETFs witnessed net inflows, taking in $1.2 billion. APs were net purchasers of corporate investment-grade debt ETFs (+$507 million) and government- mortgage ETFs (+$388 billion), while being net redeemers of government-Treasury ETFs (-$181 million). iShares 7-10 Year Treasury Bond ETF (IEF, +$804 million) and iShares MBS Bond ETF (MBB, +$357 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares 20+ Year Treasury Bond ETF (TLT, -$354 million) and iShares 1-3 Year Treasury Bond ETF (SHY, -$252 million) handed back the largest individual net redemptions for the week. For the second week in a row, municipal bond ETFs witnessed net inflows, taking in $95 million.

Conventional Equity Funds

For the first week in seven, conventional fund (ex-ETF) investors were net redeemers of equity funds, withdrawing $3.5 billion. Domestic equity funds, handing back a little less than $2.0 billion, also witnessed their second weekly net outflows while posting a 1.37% return on average for the fund-flows week. Their nondomestic equity fund counterparts, posting a 1.60% return on average, witnessed their first weekly net outflows in seven (-$1.5 billion this past week). On the domestic equity side, fund investors gave a cold shoulder to large-cap funds (-$1.5 billion net) and equity income funds (-$264 million), while on the nondomestic equity side investors were net redeemers of international equity funds (-$1.1 billion) and global equity funds (-$431 million).

Conventional Fixed Income Funds

For the sixth consecutive week, taxable bond funds (ex-ETFs) witnessed net inflows, taking in $1.8 billion this past week while posting a 0.51% return for the flows week. Fund investors were net purchasers of corporate investment-grade debt funds (+$1.4 billion) and government-mortgage funds (+$234 billion), while international & global debt funds (-$706 million) suffered the only net redemptions of the group. For the seventh week running, municipal bond funds (ex-ETFs) witnessed net inflows, taking in $1.4 billion, while posting a 0.16% gain on average (their fourth consecutive weekly gain).

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