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July 12, 2018

U.S. Weekly FundFlows Insight Report: Despite a Market Rally During the Week, Investors Are Net Redeemers of Equity Funds

by Tom Roseen.

For the first week in five investors were net purchasers of overall fund assets (including those of conventional funds and ETFs), injecting a little less than $23.4 billion for our Lipper’s fund-flows week ended July 11, 2018. However, despite strong economic news reported during the week, fund investors were net redeemers of equity funds (-$1.8 billion), while trade concerns drove investor assets into money market funds (+$21.3 billion), taxable bond funds (+$3.3 billion), and municipal bond funds (+$651 million).

Market Wrap-Up

During the flows week investors were generally optimistic ahead of the beginning of the Q2 2018 earnings reporting season, pushing the U.S. broad-based indices into the plus-column for four of the five trading days, but fund investors remained cautious. For the fund-flows week the major broad-based indices remained solidly in positive territory, with the NASDAQ Composite Price Only Index posting the strongest return of the group (+3.42%). The S&P 500 Price Only Index (+2.24%) and the Dow Jones Industrial Average Price Only Index (+2.17%) posted the second and third strongest returns. Overseas, the Xetra DAX Total Return Index (+1.47%) posted the strongest return of the broadly followed indices, trailed by the FTSE 100 Price Only Index (+0.54%) and the Nikkei 225 Price Only Index (+0.31%). The Shanghai Composite Price Only Index (-0.02%) witnessed the only decline of the group for the fund-flows week.

At the beginning of the flows week a rally in tech issues helped calm investors’ nerves after the trade-war rhetoric heated up and the Federal Reserve Board released its June FOMC meeting minutes. Facebook helped lead the tech stocks higher after a BTIG analyst significantly raised his price target for the stock. While Fed officials saw negative risks from the U.S. trade policy, they said they supported continued gradual rate increases. The Fed’s dot-plot graph indicated there will be two additional rate increases in 2018. Despite the ADP June private sector employment report coming in slightly below analyst expectations and initial jobless claims rising 3,000 the prior week, investors pushed the main indices into the green. The stock market ended the trading week on an up note after the Bureau of Labor Statistics reported the U.S. had added 231,000 jobs for June, beating analyst estimates of 200,000, which supported the argument that the economy remains healthy despite the trade-war angst.

On Monday, July 9, the Dow rose by triple digits after bank stocks witnessed their largest one-day advance in three months as strong economic data appeared to offset the rising trade tensions. The Fed showed that consumer borrowing had picked up 7.6% for May. On Tuesday the S&P 500 closed at a five-month high as investor optimism rose ahead of the upcoming Q2 earnings season. On the last trading day of the flows week investors put a halt to the market’s four-day winning streak after the Trump administration announced it would assess 10% tariffs on an additional $200 billion of Chinese goods, pressuring industrial and material stocks for the day. Adding to the malaise, the June producer price index rose 0.3%, pushing producer prices up 3.4% from a year ago—well above the Fed’s 2% target.

Exchange-Traded Equity Funds

For the sixth consecutive week equity ETFs witnessed net outflows, handing back a little more than $387 million for the flows week. Authorized participants (APs) were net purchaser of domestic equity ETFs (but only to the tune of +$368 million), adding money to the group for a first week in three. For the eighth consecutive week nondomestic equity ETFs witnessed net redemptions, this past week handing back $755 million. Schwab US Large-Cap ETF (+$902 million), Health Care Select Sector SPDR ETF (+$530 million), and Industrial Select Sector SPDR ETF (+$370 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum First Trust Technology AlphaDEX ETF (-$588 million) experienced the largest individual net redemptions, and SPDR S&P 500 ETF (-$554 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the fifth consecutive week taxable fixed income ETFs witnessed net inflows, this past week taking in $4.5 billion. APs were net purchasers of high yields ETFs (+$2.1 billion) and corporate investment-grade debt ETFs (+$1.4 billion) but were net redeemers of international & global debt ETFs (-$108 million). iShares IBoxx $ High Yield Corporate Bond ETF (+$1.6 billion) and iShares IBoxx $ Investment Grade Corporate Bond ETF (+$690 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs, while iShares 20+ Year Treasury Bond ETF (-$318 million) handed back the largest individual net redemptions for the week. For the seventh week in eight municipal bond ETFs witnessed net inflows, this past week taking in $23 million.

Conventional Equity Funds

For the third week in a row conventional fund (ex-ETF) investors were net redeemers of equity funds, removing $1.5 billion. Domestic equity funds, handing back a little more than $902 million, witnessed their eighth weekly net outflows while posting a 1.99% return on average for the flows week. Their nondomestic equity fund counterparts, posting a 0.98% gain on average, witnessed their third consecutive week of net outflows (-$556 million). On the domestic equity side fund investors shunned large-cap funds (-$1.0 billion net) and equity income funds (-$444 million), while on the nondomestic equity side investors were net purchasers of international equity funds (+$187 million) but net redeemers of global equity funds (-$743 million).

Conventional Fixed Income Funds

For the third week running taxable bond funds (ex-ETFs) witnessed net outflows, handing back $1.2 billion this past week. Fund investors padded the coffers of government-Treasury funds (+$280 million) and government-mortgage funds (+$58 million) but were net redeemers of corporate investment-grade debt funds (-$619 million) and corporate high-yield debt funds (-$240 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 three, taking in $125 million this past week. And as a result of the Fed reaffirming the likelihood of two more rate hikes this year, bank loan funds (+$59 million) witnessed their nineteenth consecutive week on net inflows. For the fifth week in six municipal bond funds (ex-ETFs) witnessed net inflows, taking in $628 million while posting a 0.13% gain on average for the fund-flows week.

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