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April 26, 2018

U.S. Weekly FundFlows Insight Report: Fund Flows Remain Positive for the Week in Spite of Market Declines and Rising Yields

by Tom Roseen.

For the second week in three investors were net purchasers of fund assets (including those of conventional funds and ETFs), injecting a little more than $8.0 billion. In spite of market declines and rising yields, fund investors were net purchasers of equity funds (+$3.5 billion), money market funds (+$3.3 billion), taxable bond funds (+$0.9 billion), and municipal bond funds (+$229 million) for the fund-flows week ended April 25, 2018.

Market Wrap-Up

Despite a strong beginning to the Q1 2018 earnings season, the markets declined in four of the five trading days of the fund-flows week as the ten-year U.S. Treasury yield rose to its highest level since December 2013. For the fund-flows week the NASDAQ Composite Price Only Index (-4.00%) witnessed the largest decline of the broad-based indices, bettered by the Dow Jones Industrial Average Price Only Index (-2.68%) and the S&P 500 Price Only Index (-2.56%). Overseas, the Shanghai Composite Price Only Index (+0.30%) posted the only plus-side return for the week after the Chinese government announced deeper economic and market reforms late in the flows week.

Shrugging off an expected Q1 earnings growth rate of around 22.0% for the S&P 500, investors focused on continued tensions in Syria, trade policy concerns, and a selloff in Treasurys at the beginning of the fund-flows week, pushing blue-chip stocks back into negative territory for the year. This was in spite of investors learning that initial jobless claims had declined by 1,000 to 232,000 for the prior week (remaining at an almost 45-year low). As the Treasury selloff continued, with the ten-year Treasury yield jumping to an almost four-year high, stocks continued their descent as investors’ concerns over rising inflation increased. The fed-funds futures market priced in an almost-40% chance of a fourth rate hike this year, according to the CME FedWatch Tool.

On Monday, April 23, the markets continued their slide as the ten-year Treasury yield settled just below 3.0%, in spite of the preliminary readings of the April manufacturing and services PMIs both showing increases and March existing home sales rising 1.1%, beating analyst expectations. The Dow suffered its fifth consecutive decline on Tuesday as the ten-year Treasury yield touched the 3% mark for the first time in four years. Investors shrugged off continued strong earnings reports from the likes of United Technologies, Caterpillar, and Verizon. According to the Proprietary Research team, 81.2% of the S&P 500 constituents that had reported Q1 earnings thus far had beaten their analyst estimates. Inflation concerns continued to trump strong earnings and economic reports. However, on Wednesday, April 25, a better-than-expected earnings result from Boeing helped the Dow break its five-day losing streak, despite the ten-year yield climbing to 3.02%—its highest level since December 27, 2013.

Exchange-Traded Equity Funds                                                                      

For the third week in a row equity ETFs witnessed net inflows, taking in a little less than $1.7 billion for the flows week. Authorized participants (APs) were net redeemers of domestic equity ETFs (-$0.5 billion), removing money from the group for the first week in three. However, for the fourth week in a row nondomestic equity ETFs witnessed net purchases, this past week attracting $2.2 billion. iShares Core S&P 500 ETF (+$1.8 billion), iShares Core MSCI EAFE ETF (+$1.3 billion), and iShares Core MSCI Emerging Markets ETF (+$574 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum PowerShares QQQ Trust 1 (-$1.9 billion) experienced the largest individual net redemptions, and iShares Russell 2000 ETF (-$1.0 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the first week in five taxable fixed income ETFs witnessed net outflows, although this past week handing back just $4 million. APs padded the coffers of corporate investment-grade debt ETFs (+$1.2 billion net) and government-Treasury ETFs (+$1.2 billion net) but were net redeemers of corporate high-yield ETFs (-$2.0 billion). iShares 20+ Treasury Bond ETF (+$597 million) and iShares Core US Aggregate Bond ETF (+$584 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs, while iShares iBoxx $ High Yield Corporate Bond ETF (-$1.1 billion) handed back the largest individual net redemptions for the week. For the second week in a row municipal bond ETFs witnessed net outflows, this past week handing back $13 million.

Conventional Equity Funds

For the first week in five conventional fund (ex-ETF) investors were net purchasers of equity funds, injecting $1.9 billion. Domestic equity funds, taking in a little more than $319 million, witnessed their first weekly net inflows in nine while posting a 2.55% decline on average for the flows week. Meanwhile, their nondomestic equity fund counterparts, posting a 2.18% decline on average, witnessed their sixth consecutive week of net inflows (+$1.6 billion). On the domestic equity side fund investors shunned equity income funds (-$614 million net) but warmed to large-cap funds (+$730 million), while on the nondomestic equity side investors were net purchasers of international equity funds (+$1.3 billion).

Conventional Fixed Income Funds

For the second consecutive week taxable bond funds (ex-ETFs) witnessed net inflows, taking in $926 million this past week. Fund investors padded the coffers of corporate investment-grade debt funds (+$822 million) and international & global debt funds (+$985 million) but were net redeemers of high-yield funds (-$491 million) and government mortgage funds (-$226 million) for the week. Despite the increase in inflationary fears, Lipper’s Inflation-Protected Bond Funds classification witnessed its fifth week of net redemptions in six, handing back $1 million this past week. Bank loan funds (+$418 million)—on the other hand—witnessed their eighth consecutive week of net inflows. For the first week in four municipal bond funds (ex-ETFs) witnessed net inflows, taking in $242 million while posting a decline of 0.52% on average for the fund-flows week.

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