October 19, 2018

Passive-Versus-Active Debate Is Influencing Fund Flows YTD

by Tom Roseen.

The headline numbers show that U.S. investors have been net purchasers of fund assets year to date, injecting a net $160.6 billion through the Lipper fund-flows week ended October 17, 2018.

Despite many investors’ believing the stock market is a little pricy these days, equity funds (including ETFs) have attracted a net $29.9 billion YTD. Interestingly, even with interest rates on the rise (there is an inverse relationship between yield and price), investors have continued to pad the coffers of taxable fixed income funds to the tune of $117.0 billion net YTD. And money market funds and tax-exempt bond funds have taken in $4.1 billion and $9.6 billion net YTD, respectively.

However, if we break down the net flows by mutual funds and ETFs, the tally becomes much more telling. YTD, mutual funds (ex-ETFs) have attracted only $25.7 billion, with equity funds handing back $52.2 billion for the year thus far, while their taxable fixed income fund counterparts have attracted a little shy of $67.0 billion. Those figures are a little counterintuitive. Even with the recent equity meltdown, the average domestic equity fund is still up 2.36% YTD, while the average fixed income fund is down 1.18%.

The supermajority of equity mutual fund net outflows can be attributed to the mass exodus from large-cap funds, which have seen net redemptions of over $65.8 billion YTD (despite the average large-cap fund being up 4.77%). Meanwhile, international equity funds have attracted some $65.9 billion net, despite the average nondomestic equity fund being down 9.30% YTD (India Region Funds [-22.14%] and China Region Funds [-19.27%] have been a heavy drag on the group). Obviously, there is no performance chasing here.

On the taxable fixed income funds (ex-ETFs) side, investors have padded the coffers of corporate investment-grade debt funds (+$94.2 billion net) and government-Treasury funds (+$17.6 billion net) while being net redeemers of corporate high-yield funds (-$22.1 billion).

However, flows into ETFs cast investors’ moves in a different light; ETFs have attracted some $134.9 billion net YTD. The active-versus-passive debate has had its influence on investors’ preferences. Equity ETFs have taken in a net $82.1 billion, while their taxable fixed income ETF and tax-exempt ETF brethren have taken in $50.0 billion and $2.7 billion, respectively.

On the equity ETF side large-cap ETFs have had net inflows of $31.4 billion, small-cap ETFs $19.6 billion, and international ETFs $16.0 billion. We are seeing a much more expected investment pattern here versus what has been witnessed in the conventional funds universe. On the fixed income side there appears to be a more even split between strategies, with investors injecting $22.0 billion net into corporate investment-grade debt ETFs and $24.6 billion net into government-Treasury ETFs.

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