by Ed Moisson.
Investors are starting to come to terms with the Federal Reserve’s possible reduction in its quantitative easing program. However, see-saw performance and volatility were ever-present during the week ended Wednesday, July 3 as good economic news contended with uncertain global developments in Portugal, Egypt and China. Mutual fund investors charged back into the market, injecting a net $10.8 billion into the funds business (including conventional funds and exchange-traded funds [ETFs]).
Equity markets saw lowered volume ahead of last Thursday’s Independence Day holiday. Many traders took vacation and the U.S. stock market closed early on Wednesday. The Dow Jones Industrial Average witnessed two days of triple-digit-moves and three of the days were in positive territory. Investors actually began treating good news as good news, bidding up the market after better-than-expected economic data, rather than the twisted, contrarian approach to investing of late June, where they sold on reports of good economic news and bought on bad news.
Relatively positive economic reports included the June ISM manufacturing number coming in at 50.6, the Eurozone PMI rising to a 16-month high in June, an upbeat Tankan survey showing sentiment among Japanese businesses improving, and upbeat job news as ADP’s private sector employment report showed a gain of 188,000. Many pundits, however, didn’t put much validity in the market moves ahead of a holiday-shortened week and instead were patiently awaiting the nonfarm payroll numbers and upcoming Q2 earnings reports. Toward week’s end, however, global issues began to fester, with the potential collapse of Portugal’s government, the Egyptian military’s plan to suspend the country’s constitution, and continued signs of China’s economic slowdown.
Nonetheless, mutual fund investors stepped on the gas. Equity funds attracted a net $4.7 billion (for the second week of net inflows in six), fixed income funds took in some $3.7 billion net (for their first week of net inflows in five), and money market funds pulled in slightly more than $3.3 billion net.
Meanwhile, municipal bond funds continued to hemorrhage assets (for the sixth consecutive week), succumbing to net outflows of $0.9 billion, although it was still an improvement from the four-week moving average of $2.5 billion of outflows.
For the second week in six, equity ETFs experienced net inflows, attracting some $1.6 billion, while their conventional mutual fund brethren took in $3.0 billion—for their twenty-seventh consecutive week of net inflows (and bringing their year-to-date total to +$108.4 billion net). Investors added money to a few “risk-on” assets as well as to benefactors of the interest rate increase. So, it wasn’t surprising to see Financial Select Sector SPDR (+$0.8 billion), iShares Russell 2000 ETF (+$0.6 million), and iShares MSCI Emerging Markets ETF ($0.5 billion) at the top of the leader board for ETFs. At the bottom of the pack were SPDR S&P 500 ETF, handing back some $1.2 billion net; ProShares Ultra S&P 500, also witnessing net outflows of $1.2 billion; and iShares Core S&P 500 ETF, giving back some $0.7 billion.
Mutual fund (ex-ETF) investors kept their focus on equity mutual funds, injecting a net $3.0 billion into them for the week. Domestic equity funds attracted net inflows for the fourth consecutive week, taking in $1.1 billion, while their nondomestic equity fund counterparts took in $1.9 billion, attracting net new money for the fifth consecutive week.
On the domestic side, investors gave a nod to large-cap funds, adding some $588 million net to the group. Despite recent political concerns, mutual fund investors once again embraced emerging market funds, injecting a net $1.0 billion into this group. With Treasury rates on the rise, investors turned their backs on government Treasury & mortgage funds and government mortgage funds, redeeming a net $445 million and $380 million, respectively. Keeping their trend intact, however, the adjustable-rate loan participation funds group attracted $820 million net for the week for its fifty-fifth week of consecutive net inflows. Caught up in the exodus from Treasuries and govies, municipal debt funds (ex-ETFs) experienced net outflows for the sixth week in a row, handing back some $0.8 billion.
For more information on this week’s fund flows data, please refer to Lipper’s fund flows website or watch the following video: