U.S. Weekly FundFlows Insight Report: Fund Investors Turn to Taxable Bond Funds During the Week

With the runoff of the French presidential election completed during the fund-flows week ended May 10, 2017, investors crossed off another uncertainty as centrist Emmanuel Macron’s win on Sunday helped ease some ongoing concerns of further isolationism among European Union members, sending the CBOE volatility index (VIX) to its lowest reading (9.77) since 1993. However, lofty equity valuations, the firing of FBI director James Comey, and the upcoming OPEC meeting left markets range bound. For the flows week the U.S. broad-based indices were mixed, with the NASDAQ Price Only Index (rising 2.49%) witnessing the largest gain of the group, and the Dow Jones Industrial Average Price Only Index (suffering a loss of just 0.07%) experiencing the only decline.

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 $1.9 billion. While investors were net redeemers of equity funds, pulling out $2.1 billion for the week, they were net purchasers of taxable bond funds (+$2.2 billion), money market funds (+$1.2 billion), and municipal bond funds (+$0.6 billion).

At the beginning of the fund-flows week investors became slightly more cautious despite learning that first-time jobless claims had fallen sharply the previous week, declining a larger-than-expected 19,000. Investors took a wait-and-see approach ahead of the French runoff election and after learning that the House Financial Services panel voted to roll back provisions of the Dodd-Frank financial reforms and that the House of Representatives voted to replace the Affordable Care Act. On Friday, May 5, the NASDAQ and S&P 500 closed at record highs after the Department of Labor reported that the U.S. economy added 211,000 jobs for April—surpassing analyst expectations of 190,000—and the unemployment rate dropped to 4.4% to match its lowest level since May 2007. After Macron’s expected victory on Sunday, U.S. markets eked out another round of record closes on Monday as the VIX finished the day at its lowest point in decades. Helped by the French election results, both the Nikkei 225 index and the Korean Kospi hit all-time highs. At the end of the fund-flows week the NASDAQ carved out another record close, chalking up its thirty-first record of 2017, even as the Dow suffered declines as some investors began to question Trump’s ability to build consensus in Washington after he fired FBI Director Comey. The energy sector rallied after near-month crude oil prices settled up 3.2% at $47.33 per barrel on news that there was a drop in U.S. crude oil supplies.

For the fifth week in a row equity ETFs witnessed net inflows, attracting just a little under $1.6 billion for the flows week. Authorized participants (APs) were net sellers of domestic equity ETFs (-$2.8 billion), redeeming money from the group for the second consecutive week. For the twentieth week running nondomestic equity ETFs witnessed net inflows, this past week attracting $4.4 billion. iShares MSCI EAFE ETF (+$1.1 billion), iShares MSCI EAFE ETF (+$0.9 billion), and iShares Core MSCI EAFE ETF (+$0.4 billion) 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 (-$2.5 million) experienced the largest individual net redemptions, and iShares Russell 2000 ETF (-$260 million) suffered the second largest net redemptions for the week.

For the seventh consecutive week conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $3.8 billion. Domestic equity funds, handing back a little less than $1.8 billion, witnessed their nineteenth week of net outflows despite posting a 0.62% return on average for the flows week, while their nondomestic equity fund counterparts, posting a 1.13% return on average, witnessed net outflows (-$2.0 billion) for the third week in four. On the domestic equity side fund investors continued to lighten up on large-cap funds (-$1.0 billion net), while on the nondomestic side they shunned international equity funds (-$1.6 billion).

For the fourth consecutive week taxable bond funds (ex-ETFs) witnessed net inflows, taking in $2.6 billion. Corporate investment-grade debt funds witnessed the largest net inflows of the group, taking in $1.9 billion, while flexible portfolio funds (+$461 million) and balanced funds (+$201 million) witnessed the next largest net inflows. Government-mortgage funds (-$155 million) witnessed the only net redemptions of the group for the week. With investors pricing in the probability of a June rate hike at 83%, according to the CME FedWath Tool, and import prices on the rise, it wasn’t too surprising to see Lipper’s Inflation-Protected Bond Funds classification taking in net new money for the twenty-seventh consecutive week (+$58 million) and bank loan funds witnessing their twenty-sixth week of net inflows, attracting some $219 million for the week. For the fifth week in a row municipal bond funds (ex-ETFs) witnessed net inflows, taking in some $575 million for the week.