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June 14, 2018

U.S. Weekly FundFlows Insight Report: Despite a Fed Rate Hike, Investors Are Net Purchasers of Taxable and Tax-Exempt Fixed Income Funds and ETFs for the Week

by Tom Roseen.

For the first week in eight investors were net redeemers of fund assets (including those of conventional funds and ETFs), withdrawing a little more than $26.3 billion for Lipper’s fund-flows week ended June 13, 2018. As a result of  general caution ahead of the G-7 summit, central bank meetings, and the Singapore summit scheduled for the week, fund investors were net redeemers of equity funds (-$9.7 billion) and, perhaps surprisingly, money market funds (-$18.1 billion). Despite the interest rate hike by the Federal Reserve Board, taxable bond funds (+$1.0 billion) were net recipients of investor assets, followed by municipal bond funds (+$450 million).

Market Wrap-Up

During the flows week investors were reserved ahead of the G-7 summit, the upcoming central bank meetings, and the much-anticipated meeting between President Donald Trump and North Korean leader Kim Jong Un scheduled during the week. For the fund-flows week the major broad-based indices managed to stay in positive territory, with the Dow Jones Industrial Average Price Only Index posting the strongest return of the group (+0.22%). The NASDAQ Composite Price Only Index (+0.19%) and the S&P 500 Price Only Index (+0.12%) posted the second and third strongest returns. Overseas, the Nikkei 225 Prince Only Index (+1.15%) posted the strongest return of the broadly followed indices, trailed by the Xetra DAX Total Return Index (+0.41%). The Shanghai Composite Price Only Index (-2.25%) witnessed the largest decline of the group for the fund-flows week.

At the beginning of the flows week the S&P 500 and the NASDAQ witnessed modest losses as tech investors took a little of their hard-won profits off the table, pressuring markets. Despite a decline in May’s initial jobless claims issued the prior week, investors remained skittish over the upcoming FOMC and European Central Bank policy meetings. Near-month crude oil prices rose on fears over supplies out of Iran and Venezuela. However, on Friday, June 8, investors shook off their G-7 trade jitters, pushing the Dow to its third straight weekly gain and its highest level since March after investors learned that April wholesale inventories rose 0.1%, the weakest gain in six months.

Despite an escalation of tensions between Trump and Canadian Prime Minster Justin Trudeau during the G-7 meeting over the weekend, the market booked modest gains on Monday as investors began to focus on the Trump-Kim summit in Singapore and the FOMC meeting on Tuesday and Wednesday. While Trump and Kim on Tuesday signed a document pledging to work toward complete denuclearization of the Korean Peninsula, investors remained reluctant to make any big bets ahead of the FOMC and ECB policy-setting meetings and after some commentators criticized the lack of verification details in the denuclearization pact. Nonetheless, U.S. stock market indices closed generally higher on Tuesday as investors learned that small-business optimism had soared in May to the second highest level in 45 years. At the end of the fund-flows week on Wednesday the markets slumped when the Fed telegraphed a more hawkish outlook than had been anticipated. As expected, the FOMC hiked its benchmark interest rate 25 basis points (bps) to a range between 1.75% and 2.00%. In its post-meeting statement policymakers also penciled in two additional rate hikes in 2018, up from March’s estimate of one more in 2018, and made hawkish changes to the text of the Fed statement. The two-and-ten year Treasury spread declined to 39 bps, the lowest since August 31, 2007.

Exchange-Traded Equity Funds

For the second consecutive week equity ETFs witnessed net outflows, handing back a little less than $4.2 billion for the flows week. Authorized participants (APs) were net redeemers of domestic equity ETFs (-$3.4 billion), removing money from the group also for a second week running. For the fourth consecutive week nondomestic equity ETFs also witnessed net redemptions, this past week handing back $0.8 billion. Financial Select Sector SPDR ETF (+$670 million), SPDR Dow Jones Industrial Average ETF (+$416 million), and Energy Select Sector SPDR ETF (+$412 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum iShares Core S&P 500 ETF (-$2.8 billion) experienced the largest individual net redemptions, and Invesco QQQ Trust 1 (-$1.5 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the first week in three taxable fixed income ETFs witnessed net inflows, this past week taking in $1.9 billion. APs were net purchasers of government-Treasury ETFs (+$970 million) and corporate investment-grade debt ETFs (+$464 million) but were net redeemers of international & global debt ETFs (-$19 million). SPDR Bloomberg Barclays High Yield Bond ETF (+$466 billion) and iShares 7-10 Year Treasury Bond ETF (+$456 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs, while iShares 0-5 Year High Yield Corporate Bond ETF (-$454 million) handed back the largest individual net redemptions for the week. For the fourth consecutive week municipal bond ETFs witnessed net inflows, this past week taking in $173 million.

Conventional Equity Funds

For the second week in a row conventional fund (ex-ETF) investors were net redeemers of equity funds, removing $5.5 billion. Domestic equity funds, handing back a little more than $3.2 billion, witnessed their fourth weekly net outflows while posting a 0.16% return on average for the flows week. Their nondomestic equity fund counterparts, posting a 0.30% loss on average, witnessed their second consecutive week of net outflows (to the tune of -$2.3 billion, their largest net outflows since the week ended December 20, 2017). On the domestic equity side fund investors shunned large-cap funds (-$1.7 billion net) and equity income funds (-$1.4 billion), while on the nondomestic equity side investors were net redeemers of international equity funds (-$1.3 billion) and global equity funds (-$1.0 billion).

Conventional Fixed Income Funds

For the second week running taxable bond funds (ex-ETFs) witnessed net outflows, handing back $915 million this past week. Fund investors padded the coffers of corporate investment-grade debt funds (+$1.6 billion) and government-Treasury funds (+$288 million) but were net redeemers of balanced funds (-$1.9 billion) and flexible funds (-$616 million) for the week. With a slight uptick in the inflation figures, Lipper’s Inflation-Protected Bond Funds classification witnessed its first week of net purchases in four, taking in $17 million this past week. And with the Fed telegraphing two more rate hikes this year in addition to the one this week, bank loan funds (+$449 million) witnessed their fifteenth consecutive week of net inflows. For the second consecutive week municipal bond funds (ex-ETFs) witnessed net inflows, taking in $277 million while posting a 0.06% loss on average for the fund-flows week.

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