by Jeff Tjornehoj.
Investors respond to pre-QE3 rally by pulling money out of equity funds — but putting it into equity ETFs.
In the final days before Federal Reserve announced a third wave of monetary policy stimulus, aka QE3, the stock market climbed higher, propelling some market indexes to the highest levels they have seen since the financial crisis. Despite a 2.5% climb in the S&P 500 index in the week ended September 12, investors pulled $1.3 billion out of equity mutual funds – the fifth week in a row during which these funds experienced net outflows. On the other hand, investors appeared to rediscover their enthusiasm for equity exchange-traded funds (ETFs), adding $12.1 billion to those products, with the biggest beneficiaries being large index ETFs like the SPY.
A lower-risk way to be “risk on” is for investors to allocate more to non-government fixed income, and unsurprisingly, affection for these products seemed to remain intact for the week ended September 12. Taxable bond funds experienced their 14th straight week of inflows, receiving another $4 billion of inflows; more than $300 million went into Federated Investors’ High Yield Bond fund. Municipal debt funds have been investor favorites for most of 2012, and pulled in another $760 million for the week ended September 12.
Money market funds also served as a magnet for investor funds, at least from institutional investors. Despite the prospect of a third round of quantitative easing the probability that today’s ultra-low interest rates will be sustained into the foreseeable future, these institutions directed $6.5 billion into money market funds, more than offsetting the $300 million of withdrawals by retail money market investors.