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April 15, 2017

Despite an Increase in Geopolitical Uncertainty, Investors Are Net Purchasers of ETF Assets

by Tom Roseen.

With increased geopolitical uncertainty and a lower-than-expected March nonfarm payrolls report, investors took a wait-and-see attitude during the fund-flows week ended Wednesday, April 12, 2017, ahead of the Q1 2017 earnings reporting season. While the CBOE volatility index (VIX) rose to its highest level in five months to close the fund-flows week at 15.77, the U.S. broad-based indices were down only marginally, with the NASDAQ Composite Price Only Index, declining 0.48%, witnessing the largest decline of the group.

Nonetheless, for the second week in three fund investors were net purchasers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting $1.5 billion. While investors were net sellers of money market funds (-$2.6 billion), they were net purchasers of municipal bond funds (+$1.6 billion), equity funds (+$1.4 billion), and taxable bond funds (+$1.0 billion).

At the beginning of the fund-flows week investors remained cautious despite learning that first-time jobless claims declined for the previous week to 234,000, the second lowest measurement since the current economic expansion began, as they awaited nonfarm-payrolls data and learned that the Federal Reserve Board will start unwinding its balance sheet sooner than expected. Investors became more risk averse on Friday, April 7, after learning about the Thursday airstrike on Syria and a weaker-than-expected nonfarm payroll report for March. The Labor Department reported the U.S. created just 98,000 new jobs for the month, missing the 185,000 expected by analysts. Despite a rise in U.S. oil rig counts, investors pushed oil prices up on the possibility of supply disruptions caused by the Syrian airstrikes. On Monday stocks gained back some ground as energy issues rose on gains in crude oil prices, but investors remained wary ahead of the Q1 earnings season. At the end of the flows week investors embraced safe-haven plays—bidding up gold, the Japanese yen, and defensive issues—and focused on the U.S.’s hardline stance on Syria and news that North Korea was threatening war if U.S. Navy ships continue their advance on the Korean Peninsula. Treasuries and gold rallied on Tuesday and Wednesday.

For the second week in three equity ETFs witnessed net inflows, attracting just a little over $2.5 billion for the flows week. Authorized participants (APs) were net sellers of domestic equity ETFs (-$0.7 billion), withdrawing money from the group for the second consecutive week. For the sixteenth week running nondomestic equity ETFs witnessed net inflows, this past week attracting $3.2 billion. iShares Core S&P 500 ETF (+$1.5 billion), iShares MSCI EAFA ETF (+$0.8 billion), and PowerShares QQQ Trust 1 (+$0.4 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum iShares Russell 2000 ETF (-$1.9 billion) experienced the largest individual net redemptions, and SPDR S&P 500 ETF (-$1.5 billion) suffered the second largest net redemptions for the week.

For the third consecutive week conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $1.2 billion. Domestic equity funds, handing back a little more than $1.7 billion, witnessed their fifteenth week of net outflows despite posting just a 0.04% loss on average for the flows week. Meanwhile, their nondomestic equity fund counterparts, posting a 0.12% return on average for the week, witnessed net inflows (+$0.5 billion) for the first week in three. On the domestic equity side fund investors continued to lighten up on large-cap funds (-$0.7 billion net), while on the nondomestic side they embraced international equity funds (+$0.7 billion).

For the first week in four taxable bond funds (ex-ETFs) witnessed net outflows, handing back just $135 million. Government-Treasury funds witnessed the largest net inflows of the group, taking in $150 million, while international & global debt funds (+$71 million) and balanced funds (+$18 million) witnessed the next largest net inflows. Flexible portfolio funds (-$199 million) and government-mortgage funds (-$145 million) witnessed the largest net redemptions of the group for the week. With Fed officials announcing during the week their plans to reduce the Fed’s balance sheet in the near term, it wasn’t too surprising to see Lipper’s Inflation-Protected Bond Funds classification taking in net new money for the twenty-third consecutive week (+$82 million) and bank loan funds witnessing their twenty-second week of net inflows, attracting some $375 million for the week. For the third week in four municipal bond funds (ex-ETFs) witnessed net inflows, taking in some $1.5 billion for the week (their largest weekly net inflows since the week ended January 9, 2013).

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