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July 26, 2018

U.S. Weekly FundFlows Insight Report: Despite Strong Earnings Reports During the Week, Fund Investors Remain Guarded in the Face of Trade-War Concerns

by Tom Roseen.

For the second consecutive week investors were net purchasers of overall fund assets (including those of conventional funds and ETFs), injecting, however, only a little more than $13 million for Lipper’s fund-flows week ended July 25, 2018. But, despite strong corporate earnings and economic news reported during the week, fund investors were net redeemers of equity funds (-$620 million) and money market funds (-$1.3 billion), while they padded the coffers of taxable bond funds (+$1.4 billion net) and municipal bond funds (+$550 million net).

Market Wrap-Up

Despite ongoing trade-war rhetoric during the flows week, investors seemed sanguine as the Federal Reserve’s Beige Book painted an upbeat economic picture and the Q2 2018 earnings season got off to a strong start, pushing the U.S. broad-based indices into the plus-column for the fund-flows week. Most of the major broad-based indices stayed in positive territory, with the S&P 500 Price Only Index posting the strongest return of the group (+1.08%). The NASDAQ Composite Price Only Index (+0.99%) and the Dow Jones Industrial Average Price Only Index (+0.85%) posted the second and third strongest returns, while the Russell 2000 Price Only Index witnessed a decline of 0.39%. Overseas, the Shanghai Composite Price Only Index (+3.19%) posted the strongest return of the broadly followed indices, trailed by the Nikkei 225 Price Only Index (+0.86%) and the FTSE 100 Price Only Index (+0.54%). The Xetra DAX Total Return Index (-1.20%) witnessed the only decline of the subgroup for the fund-flows week.

At the beginning of the flows week the Fed’s Beige Book revealed an economy that was expanding, with 11 of the 12 districts in the country reporting anecdotally that their economies were growing at a modest pace or faster. Despite June housing starts declining 12.3% from the month prior, investors cheered a strong beginning to the Q2 earnings season, with those companies reporting earnings to that point beating analyst expectations by far. Despite President Donald Trump’s fueling concerns on trade and monetary policy on Friday, July 20, investors were gearing up for the earnings reporting season to kick into high gear the next week, keeping a floor on any downside moves. However, Trump’s characterization of the European Union and China as currency manipulators weighed on the U.S. dollar index for the day.

On Monday, July 23, the Dow extended its losing streak to a third session, but both the NASDAQ and the S&P 500 closed slightly higher on a run-up in bank and technology issues. Trump added some fresh geopolitical concerns to the fray, lashing out at Iranian President Hassan Rouhani in a tweet warning him not to threaten the U.S. after Rouhani cautioned Trump against pursuing hostile policies against Iran. The ten-year Treasury yield witnessed its largest jump in about seven weeks, closing the day at 2.96%, after Trump complained that the Fed’s tight monetary policy was putting the U.S. at a competitive disadvantage because of a strengthening dollar. On Tuesday stocks motored higher after Alphabet beat earnings estimates and as the busiest week of the earnings-reporting season continued. While 35% of the S&P 500 constituents were slated to report their Q2 earnings during the week, trade concerns kept the market in check as Trump tweeted that “Tariffs are the greatest” in his attempt to get a better trade deal with our trading partners. Nonetheless, according to the Proprietary Research team, of the 217 S&P 500 constituents that had reported Q2 earnings, 83.9% and 72.8% beat their analyst earnings and revenue expectations, respectively. The markets rallied on the last trading day of the fund-flows week, with the NASDAQ notching its twenty-fifth record close of 2018 as Trump obtained concessions from the European Union’s Jean-Claude Juncker, averting a trade-war confrontation between the U.S. and the E.U. Regardless, fund investors continued to be on guard.

Exchange-Traded Equity Funds

For the second consecutive week equity ETFs witnessed net inflows, taking in a little more than $2.5 billion for the flows week. Authorized participants (APs) were net purchaser of domestic equity ETFs (+$2.0 billion), adding money to the group for a third week in a row. For the second consecutive week nondomestic equity ETFs also witnessed net inflows, this past week attracting $563 million. SPDR S&P 500 ETF (+$1.9 billion), JPMorgan BetaBuilders Japan ETF (+$703 million), and Financial Select Sector SPDR ETF (+$649 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum Invesco QQQ Trust 1 (-$1.6 billion) experienced the largest individual net redemptions, and iShares Russell 2000 ETF (-$911 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the seventh consecutive week taxable fixed income ETFs witnessed net inflows, this past week taking in $811 million. APs were net purchasers of government Treasury ETFs (+$689 million) and corporate investment-grade debt ETFs (+$632 million) but were net redeemers of corporate high-yield ETFs (-$537 million). iShares 20+ Year Treasury Bond ETF (+$480 million) and iShares 7-10 Year Treasury Bond ETF (+$357 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs, while iShares iBoxx $ High Yield Corporate Bond ETF (-$462 million) handed back the largest individual net redemptions for the week. For the third week in a row municipal bond ETFs witnessed net inflows, this past week taking in $131 million.

Conventional Equity Funds

For the fifth week running conventional fund (ex-ETF) investors were net redeemers of equity funds, removing $3.2 billion. Domestic equity funds, handing back a little more than $1.5 billion, witnessed their tenth weekly net outflows while posting a 0.63% return on average for the flows week. Their nondomestic equity fund counterparts, posting a 1.17% gain on average, witnessed their fifth consecutive week of net outflows (-$1.7 billion). On the domestic equity side fund investors shunned large-cap funds (-$952 million net) and equity income funds (-$436 million), while on the nondomestic equity side investors were net redeemers of global equity funds (-$1.0 billion) and international equity funds (-$648 million).

Conventional Fixed Income Funds

For the second week running taxable bond funds (ex-ETFs) witnessed net inflows, attracting $615 million this past week. Fund investors padded the coffers of corporate investment-grade debt funds (+$1.4 billion) and government-Treasury funds (+$59 million) but were net redeemers of flexible funds (-$319 million) and balanced funds (-$246 million) for the week. After the release of the Fed’s Beige Book with its sanguine outlook for the economy, it wasn’t surprising to see Lipper’s Inflation-Protected Bond Funds classification witnessing its third consecutive week of net inflows, taking in $49 million this past week. And as a result of the Fed’s reaffirming its plans for two more rate hikes this year, bank loan funds (+$263 million) witnessed their twenty-first consecutive week of net inflows. For the third consecutive week municipal bond funds (ex-ETFs) witnessed net inflows, taking in $419 million while posting a 0.15% loss on average (their first weekly decline in six).

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