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September 19, 2016

U.S. Fund-Flows Weekly Report: Rate Hike Uncertainty Drives Investors Away From Equity Funds

by Pat Keon, CFA.

Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds [ETFs]) experienced their fifth worst net outflows of the year (-$22.1 billion) for the fund-flows week ended Wednesday, September 14. This large negative flow number was driven by equity funds, which posted their largest weekly outflows of the year at $14.4 billion. The only macro group that managed to post net inflows for the week was municipal bond funds, which extended their consecutive inflows streak to 50 weeks by recording a positive flow of $486 million. Money market funds (-$5.3 billion) and taxable bond funds (-$2.9 billion) both contributed to the week’s net outflows.

The equity markets experienced a volatile week of trading driven by uncertainty over what direction the Federal Reserve will take. The S&P 500 Index was off 2.8% for the week and experienced three consecutive trading days in which its returns were either up or down over 1% (two days were down, one day up). On Friday, September 9, the market turned in its worst one-day performance since the “Brexit” vote (the S&P 500 Index shed 2.5%), primarily on hawkish comments from a Fed official who indicated that the time was right for an interest rate hike. The index recovered 1.5% the next day as a different Fed official issued dovish comments about the possibility of a rate hike, stating that the U.S. economy needed to be stronger (as measured by increases in consumer spending and inflation) to shield itself against overseas economic weakness. The following day saw the S&P 500 give back all of the previous day’s gains as losses by energy stocks (because of a slump in oil prices) and financials (the lack of a threat of an interest rate increase hurt this sector) hamstrung the broader market.

Equity ETFs (-$9.1 billion) took the lead in outflows for the equity funds group while equity mutual funds marked their twenty-seventh consecutive week of net outflows as $5.4 billion left their coffers. For ETFs the largest net outflows for the week belonged to some of its biggest players: SPDR S&P 500 ETF (SPY) and PowerShares QQQ (QQQ) saw $3.4 billion and $1.7 billion, respectively, leave. On the mutual fund side domestic equity funds (-$4.4 billion) accounted for the lion’s share of the net outflows.

Similar to equity funds, the majority of the net outflows for the taxable bond funds group came from ETFs. For the week taxable bond ETFs experienced negative net flows of $2.7 billion, while taxable bond mutual funds’ outflows were much more muted at $232 million. Funds in Lipper’s High Yield Funds classification had the largest net outflows for both ETFs (-$2.1 billion) and mutual funds (-$357 million) as investors took a risk-off approach.

Municipal bond mutual funds raised their consecutive net-inflows streak to 50 weeks with positive flows of $500 million. The largest net inflows among the muni bond group for the week belonged to High Yield Muni Debt Funds (+$158 million) and Intermediate Muni Debt Funds (+$142 million).

The net outflows from money market funds (-$5.3 billion) were the net result of outflows from Institutional Money Market Funds (-$35.4 billion net) and inflows into Institutional U.S. Government Money Market Funds (+$30.9 billion net).

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