November 8, 2019

Fund and ETF Investors Still in Risk-Off Mode

by Tom Roseen.

Despite the U.S. broad-based indices hitting new closing highs last week and the average equity mutual fund returning 19.03% year to date, equity mutual funds (including ETFs) continue to suffer from net redemptions. Year to date (YTD) through the week ended November 6, 2019, investors have redeemed a net $149.9 billion from equity funds.

And even with stingy yields on the fixed income side of the universe, YTD investors continue to plow money into taxable fixed income funds (+$239.7 billion) and municipal bond funds (+$77.0 billion). That said, the average taxable fixed income fund has posted an eye-popping 7.49% return YTD, while its tax-exempt counterpart returned 5.69% over the same period.

The average mutual fund investor appears to be somewhat risk averse and content with sitting on the sidelines, padding the coffers of money market funds (+$447.8 billion). Notwithstanding a strong Q3 corporate earnings season, a third interest rate cut this year by the Federal Reserve, and hints of a phase-one trade agreement between the U.S. and China, investors appear to be enamored with safe-haven securities as the equity bull market seems to be getting a little long in the tooth.

While U.S. investors continue to flock to corporate investment-grade debt funds (including ETFs), injecting $151.1 billion into the group YTD, government-Treasury funds (+$32.7 billion) attracted the next largest draw in the taxable fixed income universe. Although for the week ended November 6, 2019, government-Treasury funds suffered net redemptions of $1.8 billion, which might be expected given the late month rally in equities.

On the equity side, while the supermajority of the macro-groups have suffered net redemptions, the Commodities Precious Metals Funds classification has taken in the largest draw of net new money of any of the equity macro-groups, taking in $10.6 billion YTD—its largest full year net inflows since the classification was launched in 2011. Only three other equity macro-groups (including funds and ETFs) have attracted net new money so far this year, with sector-utility funds (+$3.2 billion), sector-technology funds (+$3.1 billion), and equity income funds (+$2.8 billion) taking in the only other net inflows this year.

Zeroing in on ETFs, investors appear a little more risk tolerant, injecting a net $51.2 billion into equity ETFs YTD, with large-cap ETFs (+$44.9 billion) taking in the lion’s share of net new money. However, taxable bond ETFs (+$102.1 billion) have handsomely outdrawn their equity ETF counterparts. While corporate investment-grade debt ETFs (+$36.0 billion) have attracted the largest amount of net new money YTD in the ETF taxable bond fund universe, government-Treasury ETFs (+$23.9 billion) have attracted the next largest sum, followed by corporate high-yield ETFs (+$12.9 billion).

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