January 10, 2019

U.S. Weekly FundFlows Insight Report: Mutual Fund and ETF Investors Cheer Improving Trade Talks for the Week

by Tom Roseen.

For the second week in three, investors were overall net purchasers of fund assets (including those of conventional funds and ETFs), injecting $35.8 billion for Lipper’s fund-flows week ended January 9, 2019.  Fund investors were net purchasers of money market funds (+$17.1 billion), equity funds (+$8.7 billion), taxable fixed income funds (+$8.4 billion), and municipal bond funds (+$1.6 billion).

Market Wrap-Up

Investors turned upbeat during the fund flows week, cheering news that the U.S. and China have narrowed their disagreements on trade, the release of a stellar December nonfarm payrolls report, and that the Fed was becoming a little more dovish in its comments. The Russell 2000 Price Only Index (+6.11%) posted the strongest returns of the broad-based indices for the flows week, followed by the NASDAQ Composite Price Only Index’s 4.37%, and the S&P 500 Price Only Index’s 2.99% plus-side returns. Investors turned more bullish on overseas issues as well on the news of the U.S. and China making headway in their discussions on trade and the rise of near-month oil prices above the $50/bbl mark, with the Xetra DAX Total Return Index (+3.88%) and FTSE 100 Price Only Index (+3.70%) posting the strongest returns of the broadly followed overseas indices.

At the beginning of the flows week, the Dow suffered a precipitous decline after Apple cut its quarterly revenue forecast for the first time in more than 15 years, and the ISM manufacturing index declined to 54.1% in December (its slowest pace of growth in two years). However, on January 4, the Department of Labor reported the U.S. economy added 312,000 new jobs in December, shattering analyst expectations of 182,000, and pushing the U.S. broad-based indices higher. Global sentiment improved as well after China’s central bank cut the ratio of cash that banks need to hold as reserves by 1%, providing greater liquidity in the market.

On Monday, January 7, markets got another shot in the arm after senior officials from China attended the negotiations between Beijing and their cohorts in Washington, triggering optimism that the two countries are seriously looking for resolutions to their ongoing trade dispute. Despite Samsung on Tuesday warning of a decline in Q4 operating profits and a decline in small-business optimism by the National Federation of Independent Business in December, investors continued to cheer the nonfarm payrolls report, advances in China/U.S. trade talks, and expectations of fewer interest rate hikes, pushing the equity markets to their third straight day of plus-side performance. Optimism over trade talks and dovish minutes from the FOMC’s December meeting pushed the S&P 500 to its longest win streak since September 2018 on Wednesday. A multi-day rise in near-month oil futures to more than $50/bbl also inspired optimism in the global equity markets.

Exchange-Traded Equity Funds

For the third week in four, equity ETFs witnessed net inflows, taking in a little more than $4.3 billion for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (but only to the tune of $744 million), also for the third week in four. However, nondomestic equity ETFs witnessed net inflows for the fifteenth week in a row, attracting $3.6 billion (their largest weekly net inflows since January 31, 2018) this past week. iShares Edge MSCI USA Quality Factor ETF (+$1.5 billion) and iShares Core MSCI Emerging Markets ETF (+$923 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR S&P 500 ETF (-$1.3 billion) experienced the largest individual net redemptions, and Consumer Discretionary Select Sector SPDR Fund (-$629 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the eighth week in a row, taxable fixed income ETFs witnessed net inflows, taking in $9.3 billion. APs were net purchasers of government-Treasury ETFs (+$6.3 billion) and corporate investment-grade ETFs (+$962 million) while witnessing no net redemptions for the other macro-groups. iShares 7-10 Year Treasury Bond ETF (+$2.0 billion) and SPDR Bloomberg Barclays Intermediate Term Treasury ETF (+$848 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, Invesco BulletShares 2018 Corporate Bond ETF (-$571 billion) and Invesco BulletShares 2018 High Yield ETF (-$487 million) handed back the largest individual net redemptions for the week after shuttering the funds due to the term nature of those offerings. For the ninth week in a row, municipal bond ETFs witnessed net inflows, taking in $205 million.

Conventional Equity Funds

For the first week in twenty-nine, conventional fund (ex-ETF) investors were net purchasers of equity funds, injecting $4.4 billion (their largest weekly net inflows since June 20, 2018). Domestic equity funds, taking in a little less than $3.3 billion, witnessed their second weekly net inflows in three while posting a 3.99% return on average for the fund-flows week. Their nondomestic equity fund counterparts, posting a 4.08% return on average, witnessed their first weekly net inflows since September 19, 2018, (+$1.1 billion this past week). On the domestic equity side, fund investors embraced large-cap funds (+$2.5 billion net) and mid-cap funds (+$458 million), while on the nondomestic equity side investors were net purchasers of international equity funds (+$1.4 billion).

Conventional Fixed Income Funds

For the seventh consecutive week, taxable bond funds (ex-ETFs) witnessed net outflows, handing back $926 million this past week despite posting a 1.01% return for the flows week. Fund investors were net redeemers of corporate investment-grade debt funds (-$2.1 billion) and government-Treasury funds (-$260 million), while corporate high yield funds attracted some $907 million, followed by government-mortgage funds (+$466 million). For the second week in three, municipal bond funds (ex-ETFs) witnessed net inflows, taking in $1.3 billion while posting a 0.03% gain on average (their ninth weekly gain in row).

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