October 24, 2019

U.S. Weekly FundFlows Insight Report: Shrugging Off a Strong Beginning to the Q3 Earnings Season, Investors and APs Continue to Prefer Bond Funds During the Week

by Tom Roseen.

For the eighth week in a row, investors were overall net purchasers of fund assets (including those of conventional funds and ETFs), injecting $21.6 billion for Lipper’s fund-flows week ended October 23, 2019. Once again, fund investors were net purchasers of money market funds (+$17.7 billion), taxable fixed income funds (+$6.3 billion), and municipal bond funds (+$1.4 billion). However, they were net redeemers of equity funds (-$3.9 billion).

Market Wrap-Up

For the fund-flows week ended October 23, 2019, while market participants kept a close eye on economic releases, Brexit, and Sino-American trade discussions, their main focus was Q3 corporate earnings announcements. During the week, though, the Dow Jones Industrial Average was pressured after a report indicated that Boeing might have misled federal aviation authorities about the safety of the 737 Max jet and after Johnson & Johnson announced a recall of a single lot of J&J’s baby powder that had traces of chrysotile asbestos. Overall, though, the Q3 earnings season has kept investors in the game, with approximately 80% of the S&P 500 constituents which have reported earnings thus far (168) beating analyst expectations. The Russell 2000 Price Only Index (+1.82%) posted the strongest returns of the broadly followed U.S indices for the fund-flows week, followed by the S&P 500 Price Only Index (+0.50%), while the Dow Jones Industrial Average Price Only Index (-0.62%) suffered the largest loss. Overseas, the FTSE 100 Price Only Index (+1.91%) and the Xetra DAX Total Return Index posted the strongest plus-side returns of the subgroup, rising 1.60% for the fund-flows week, while the Shanghai Composite Price Only Index (-0.85%) witnessed the only one-week decline of the other often followed broad-based global indices.

Stocks rose on Thursday, October 17, as the S&P 500 ended the day within 1% of an all-time high on optimism over a Brexit draft agreement and an upbeat start to the Q3 corporate earnings season.  Investors appeared to shrug off a 9% decline in U.S. September new home construction and news that September industrial production fell 0.4%, its largest one-month decline since April. On Friday, October 18, the Dow was dragged down on news from Johnson & Johnson and Boeing. Despite good earnings reports from the likes of American Express, E*Trade, and Coca-Cola, investors remained cautious for the day after learning that China reported that its Q3 economic growth slowed to 6.0%—its slowest growth since early 1990s—as business investment slowed.

On Monday, October 21, markets rose on optimism over trade talks and better-than-expected corporate earnings, with the S&P 500 Index nearing a record close. Investors cheered news that China’s Vice Premier Liu He said that the U.S. and China have laid the groundwork in the first phase of a resolution to its trade disagreement. On Tuesday, stocks ended lower as investors weighed the impact a new social media bill might have on the tech behemoths and on concerns over Brexit after U.K. lawmakers voted to allow Prime Minister Boris Johnson’s Brexit plan to proceed, but they rejected the rapid timetable for approval. On Wednesday, equities rose despite disappointing earnings from Caterpillar and Boeing. Oil futures got a shot in the arm after a U.S. government report showed, for the first week in six, a decline in U.S. crude supplies.

Exchange-Traded Equity Funds

For the second week in a row, equity ETFs witnessed net inflows, although they attracted just $104 million for the most recent fund-flows week. Authorized participants (APs) were net redeemers of domestic equity ETFs (-$1.0 billion) for the fourth week in five. However, nondomestic equity ETFs witnessed net inflows for the fourth consecutive week—taking in $1.1 billion this past week. iShares Core S&P Total U.S. Stock Market ETF (ITOT, +$544 million) and iShares MSCI Japan ETF (EWJ, +$468 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 (IVV, -$1.1 billion) experienced the largest individual net redemptions, and iShares QQQ Trust 1 ETF (QQQ, -$682 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the fifth straight week, taxable fixed income ETFs witnessed net inflows, attracting $3.1 billion. APs were net purchasers of corporate investment-grade debt ETFs (+$1.1 billion) and corporate high yield ETFs (+$1.1 billion) while being net redeemers of balanced ETFs (-$5 million). iShares iBoxx $ High Yield Corporate Bond ETF (HYG, +$522 million) and SPDR Bloomberg Barclays High Yield Bond ETF (JNK, +$239 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares 20+ Year Treasury Bond ETF (TLT, -$84 million) and Invesco Emerging Markets Sovereign Debt ETF (PCY, -$61 million) handed back the largest individual net redemptions for the week. For the third week in a row, municipal bond ETFs witnessed net inflows, taking in $222 million.

Conventional Equity Funds

For the thirty-sixth consecutive week, conventional fund (ex-ETF) investors were net redeemers of equity funds, withdrawing $4.0 billion. Domestic equity funds, handing back a little more than $2.9 billion, witnessed their thirty-seventh weekly net outflows while posting a 0.30% return on average for the fund-flows week. Their nondomestic equity fund counterparts, posting a 0.48% gain on average, witnessed their tenth consecutive week of net outflows, handing back some $1.0 billion this past week. On the domestic equity side, fund investors turned their backs on large-cap funds (-$2.4 billion) and small-cap funds (-$492 million), while investors on the nondomestic equity side were net sellers of international equity funds (-$800 million) and global equity funds (-$239 million).

Conventional Fixed Income Funds

For the third consecutive week, taxable bond funds (ex-ETFs) witnessed net inflows, attracting some $3.2 billion this past week while posting a 0.18% return for the fund-flows week. Investors were net purchasers of corporate investment-grade debt funds (+$2.1 billion) and flexible funds (+$368 million), while corporate high-quality funds (-$13 million) witnessed the largest net outflows of the group. For the forty-second straight week, municipal bond funds (ex-ETFs) witnessed net inflows—taking in $1.2 billion—while posting a 0.27% loss on average for their second consecutive weekly market decline.

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