by Tom Roseen.
Money market funds were the big winners in the week ended Wednesday, August 28, seeing net inflows of more than $5 billion, while other fund categories saw net redemptions. Investors were given many reasons to pull back on the reins: technical glitches on the NASDAQ, news of the federal debt ceiling and turmoil in Syria.
On August 22, the NASDAQ closed its markets to any trades for about three hours (the majority of the downtime, however, was attributed to paralysis caused by confusion on how best to ensure an “orderly reopening of trading”).
Historically, similar errors were causes of the 2010 “flash crash” and the 1987 and 1994 incidents when squirrels chewed through the power lines. This time empty desks in the trading and portfolio departments at the end of summer—ahead of the Labor Day weekend—was probably a contributing factor to the low-volume response; the markets actually posted plus-side returns that day. Economic data showed applications for jobless benefits declined to an over-five-year low and U.S. housing prices climbed 0.7% for June.
Later in the week, there were predictions that the U.S. government would hit the debt ceiling in mid-October. Also, Secretary of State John Kerry announced the U.S. would hold Syria’s government accountable for using chemical weapons against its own citizens – and the general markets withered.
In a flight to safety, investors bid up the prices of gold (to a three-month high) and oil (pushing it over $109 per barrel for the first time this year), while they pushed the yield on the benchmark ten-year Treasury note to 2.72% (down 7 basis points [bps] in a day). Despite decent economic news and upbeat German and U.K. GDP data, saber-rattling over the atrocities in Syria cast a pall over the markets; crude oil settled above $110 for the first time in over two years.
Surprisingly, the major indices lost only about 50 bps during the week, with the S&P 500 Price Only Index declining 0.48% and the DJIA losing 0.49%, while the NASDAQ was down only 0.18%.
Mutual fund investors were net purchasers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting a net $2.2 billion for the week. However, the only reason net flows were positive was because money market funds witnessed net inflows to the tune of $5.5 billion, while equity funds handed back some $0.9 billion, taxable bonds saw net redemptions of $0.7 billion, and municipal bond funds took it on the chin once again, suffering net redemptions of $1.7 billion.
For the third consecutive week, equity ETFs experienced net outflows, handing back some $3.1 billion. ETF investors remained risk-averse after learning of the reported chemical attacks in Syria, the looming U.S. debt ceiling, the NASDAQ glitch, and the rise in the Chicago Board Options Exchange Volatility Index (VIX).
ETF investors appeared slightly at odds with their trades, allocating the largest sum of net new money to SPDR Gold (+$343 million net), while redeeming the second largest amount from Market Vectors Gold Miners ETF (-$698 million net). With market volatility on the rise, it wasn’t surprising to see SPDR S&P 500 handing back the largest net outflows for the group at $1.3 billion net and SPDR Dow Jones Industrial Average ETF handing back some $0.5 billion for the week. In a contrarian play and on a widely expected increase in interest rates, ETF investors injected some $303 million into iShares MSCI Brazil Index, while iShares U.S. Real Estate ETF received $200 million net for the week.
Mutual fund (ex-ETF) investors’ interest in equity mutual funds remained intact; they injected a net $2.2 billion for the week (for the funds’ thirty-fourth consecutive week of net inflows and bringing their year-to-date total to +$134.7 billion net). Domestic equity funds attracted net inflows for the 12th consecutive week, taking in a little over $1.0 billion, while their nondomestic equity fund counterparts took in $1.2 billion and attracted net new money for the 13th consecutive week. On the domestic side investors once again preferred large-cap funds, along with gold and natural resources funds, adding a net $527 million and $218 million, respectively, to their coffers. With a little more focus on the conservative side, mutual fund investors appeared to prefer developed-market funds over other world equity funds; they injected a net $1.0 billion into international funds, with only about $181 million of the sum being allocated to emerging markets funds.
Taxable bond funds (ex-ETFs) took in a net $159 million for the week—for their third week of net inflows in four. With Treasury yields remaining on the high side, investors once again kept their backs turned on government Treasury & mortgage funds and government mortgage funds, redeeming a net $207 million and $511 million, respectively. As fixed income investors continued to anticipate rising interest rates, however, the adjustable-rate loan participation funds group attracted $1.1 billion net for the week—for its 63rd consecutive week of net inflows, while flexible portfolio funds attracted some $0.7 billion. Still reeling from the one-two punch caused by Detroit’s bankruptcy, municipal debt funds (ex-ETFs) experienced net outflows for the 14th week in a row, handing back some $1.7 billion.