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May 27, 2016

Weekly U.S. FundFlows Insight Report: Fed’s Hawkish Tone Casts Interest Rate Fears Over Investors During the Week

by Tom Roseen.

With Q1 2016 company earnings reports slowing to a trickle during the fund-flows week ended May 25, investors began to once again focus on economic data and the Federal Reserve. Investors were particularly bothered by the minutes from the Fed’s latest meeting, which highlighted the central bank’s intent to raise interest rates soon, provided the fundamentals of the U.S. economy remain steady.

Shrugging off news that the number of Americans applying for unemployment benefits declined in mid-May, the S&P 500 dipped into negative territory on a year-to-date basis as investors learned interest rates could rise as early as June and after seeing a rising U.S. dollar weigh on dollar-denominated commodities at the beginning of the flows week. Interest rate-hike fears were further supported by a 1.2% rise in April existing-home sales. Utility shares and other dividend-paying issues took it on the chin as investors weighed the impact rising interest rates might have on dividend-paying stocks. However, on what some pundits are referring to as a technical rally, both the Dow Jones Industrial Average and the S&P 500 Index witnessed their largest one-day percentage gains since mid-March, with financial and technology shares leading the broad-based rally. April new-home sales rose a whopping 16.6%, their largest monthly gain in 24 months, and oil prices resumed their ascension. On the last trading day of the flows week near-month crude oil futures prices rose to their highest mark since October 2015, closing the day out at $49.56/barrel.

For the second consecutive week fund investors were net purchasers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting a net $4.9 billion for the fund-flows week. While investors were net sellers of equity funds (-$4.8 billion), they padded the coffers of money market funds (+$7.3 billion), taxable bond funds (+$1.5 billion), and municipal bond funds (+$1.0 billion).

For the first week in four equity ETFs witnessed net inflows, although only to the tune of $81 million. As a result of favorable economic news, authorized participants (APs) were net purchasers of domestic equity ETFs (+$2.1 billion), injecting money into the group for the second week in three. And as a result of weakening in commodity prices and uncertainty over the timing of the next U.S. interest rate increase, APs—for a fourth consecutive week—were net redeemers of nondomestic equity ETFs (-$2.0 billion). iShares Russell 2000 ETF (+$1.4 billion), SPDR Gold Trust (+$501 million), and Financial Select Sector SPDR Fund (+$408 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 (-$2.4 billion) experienced the largest net redemptions, while iShares MSCI Emerging Markets ETF (-$1.3 billion) suffered the second largest redemptions for the week.

For the eleventh week running conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $4.9 billion from the group. Domestic equity funds, handing back a little shy of $4.0 billion, witnessed their sixteenth consecutive week of net outflows but posted a weekly performance gain of 2.30%, while their nondomestic equity fund counterparts, posting a 1.86% gain for the week, witnessed net outflows (-$1.0 billion) for the first week in four. On the domestic side investors lightened up on large-cap funds and real estate funds, redeeming a net $2.3 billion and $581 million, respectively. On the nondomestic side international equity funds witnessed $0.8 billion of net outflows.

For the eighth week in a row taxable bond funds (ex-ETFs) witnessed net inflows, taking in a little over $1.0 billion. Corporate investment-grade bond funds witnessed the largest net inflows, taking in $0.7 billion (for their eighth week in a row of net inflows), while balanced funds witnessed the second largest net inflows (+$298 million) of the macro-group. International & global debt funds witnessed the largest net redemptions of the group, handing back $339 million for the week. For the thirty-fourth week in a row municipal bond funds (ex-ETFs) witnessed net inflows, taking in $840 million this past week.

For more information on this week’s Lipper fund flows data, please refer to Lipper’s U.S. Fund Flows website.

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