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May 24, 2018

U.S. Weekly FundFlows Insight Report: Investors Inject Net New Money Into the U.S. Fund Industry for a Fifth Consecutive Week

by Tom Roseen.

For the fifth week in a row investors were net purchasers of fund assets (including those of conventional funds and ETFs), adding a little more than $9.9 billion for the fund-flows week ended May 23, 2018. Despite continued trade war concerns and an initial jump in Treasury yields, fund investors were net purchasers of equity funds (+$3.7 billion), taxable bond funds (+$3.1 billion), money market funds (+$3.0 billion), and municipal bond funds (+$233 million).

Market Wrap-Up

During the flows week volatility, while on the retreat, remained ever present as investors worried about the ongoing China/U.S. trade talks, a possible oil disruption from Iran and Venezuela—leading to a rally in crude oil, and—at least initially—a persistent rise in the ten-year Treasury yield. However, while defensive issues generally struggled during the flows week, small-cap issues rallied, with the Russell 2000 Price Only Index rising in four of the five trading days. Separately, investors cheered a dovish tone after the Federal Reserve Board released its May 2 meeting minutes. For the fund-flows week the Russell 2000 Price Only Index (+0.70%) witnessed the largest rise of the broad-based indices, followed by the Dow Jones Industrial Average Price Only Index (+0.48%) and the NASDAQ Composite Price Only Index (+0.37%). Overseas, the Xetra DAX Total Return Index (-0.85%) posted the largest loss for the week, while the Nikkei 225 witnessed the only plus-side performance—gaining, however, only 0.21% of its prior week’s value.

At the beginning of the flows week defensive issues, primarily utilities and real estate issues, took it on the chin as investors weighed the impact rising bond yields would have on these sectors. In addition, techs suffered a rough patch after Cisco reported lower-than-expected earnings. With growing geopolitical tensions, a rising dollar, and new concerns over Italian politics (somewhat akin to the genesis of the Greek debt crisis), investors turned toward domestic small-cap issues, which are less impacted by some of these issues than are large global entities. With the lingering concerns over trade negotiations between the U.S. and China and a jump in the ten-year Treasury to its highest mark since July 7, 2011, U.S. stocks closed mostly lower on Friday, May 18, with the Russell 2000 extending its winning streak to a third consecutive day.

On Monday, May 21, the market rallied, with the Dow marking its highest close since March 12  and the Russell 2000 posting its fourth consecutive record close after Treasury Secretary Steven Mnuchin said President Donald Trump’s administration would “put the trade war on hold,” easing trade hostilities between China and the U.S. Near-month crude oil prices jumped to $72.24/barrel on fears that that U.S. could impose new sanctions on Venezuela after weekend elections in the country were viewed by many as illegitimate. On Tuesday uncertainties over the trade policy sent stocks lower after Trump indicated trade negotiations had “a long way to go” and after investors learned that the historical meeting between Trump and North Korean dictator Kim Jong Un may happen later than expected. However, on Wednesday, May 23, the stock market staged a comeback after the Fed minutes hinted at gradual rate hikes. After release of the dovish Fed minutes the ten-year Treasury yield traded down as low as 2.99% before closing out the day at 3.01%. Oil futures declined and settled at $71.84/barrel as investors anticipated that OPEC could boost its output to make up for output declines from Venezuela and Iran.

Exchange-Traded Equity Funds                                                                      

For the seventh week in a row equity ETFs witnessed net inflows, taking in a little more than $4.2 billion for the flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$5.2 billion), adding money to the group for the fourth consecutive week. However, for the third week in four nondomestic equity ETFs witnessed net redemptions, this past week handing back $1.0 billion. iShares Russell 2000 ETF (+$1.2 billion), iShares Core S&P 500 ETF (+$454 million), and PowerShares QQQ Trust 1 (+$432 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum iShares MSCI EAFE Value ETF (-$818 million) experienced the largest individual net redemptions, and iShares US Real Estate ETF (-$293 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the fourth week running taxable fixed income ETFs witnessed net inflows, this past week taking in $2.3 billion. APs padded the coffers of corporate investment-grade debt ETFs (+$1.5 billion net) and corporate high-yield ETFs (+$520 million net) but were net redeemers of flexible ETFs (-$169 million) and government-mortgage ETFs (-$17 million). SPDR Bloomberg Barclays High Yield Bond ETF (+$428 million) and iShares iBoxx $ Investment Grade Corporate Bond ETF (+$424 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs, while ProShares Ultra Short Lehman 20+ Year Treasury ETF (-$106 million) handed back the largest individual net redemptions for the week. For the third week in four municipal bond ETFs witnessed net inflows, this past week taking in $105 million.

Conventional Equity Funds

For the third week in four conventional fund (ex-ETF) investors were net redeemers of equity funds, removing $571 million. Domestic equity funds, handing back a little more than $1.8 billion, witnessed their third weekly net outflows in four while posting a 0.43% return on average for the flows week. Meanwhile, their nondomestic equity fund counterparts, posting a 0.53% loss on average, witnessed their tenth consecutive week of net inflows (+$1.3 billion). On the domestic equity side fund investors shunned large-cap funds (-$851 million net) and mid-cap funds (-$540 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 $798 million this past week. Fund investors padded the coffers of corporate investment-grade debt funds (+$982 million) and international & global debt funds (+$519 million) but were net redeemers of balanced funds (-$340 million) and corporate high-yield funds (-$259 million) for the week. Despite the presence of inflationary fears by some, Lipper’s Inflation-Protected Bond Funds classification witnessed its fourth week of net redemptions in five, handing back $39 million this past week. Bank loan funds (+$420 million)—on the other hand—witnessed their twelfth consecutive week of net inflows. For the third week in a row municipal bond funds (ex-ETFs) witnessed net inflows, taking in $128 million while posting a 0.08% return on average for the fund-flows week.

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