December 13, 2019

Fund and ETF Investors Remain Cautious Despite Eye-Popping YTD Returns

by Tom Roseen.

Investors have turned to fund products that provide both yield and return as the Federal Reserve Board recently signaled it plans to hold interest rates steady—possibly throughout 2020—after applying its third rate cut of the year in late November.

While investors have turned a cold shoulder to equity funds in 2019, withdrawing a net $156.5 billion year to date (through the Lipper fund-flows week ended Wednesday, December 11, 2019), they padded the coffers of dividend paying funds, injecting net new money into equity income funds (+$8.7 billion YTD) and utilities funds (+$2.4 billion).

Only two other equity macro-groups attracted net new money year to date with sector-technology and sector-other (comprised of commodities funds and industrial/basic material funds) funds, taking in $4.4 billion and $8.4 billion, respectively. In contrast, the big losers year to date in the equity funds universe (including ETFs) were large-cap funds (-$81.3 billion), global funds (-$22.9 billion), and sector health/biotechnology funds (-$16.0 billion).

That said, fund investors did pad the coffers of equity ETFs, injecting a net $92.0 billion year to date, while being net redeemers for equity mutual funds, withdrawing a whopping $248.5 billion so far this year, leading us to the headline numbers stated above. Redemptions out of large-cap funds (-$144.3 billion, ex-ETFs) accounted for more than half of those net outflows.

On the fixed income fund side of the universe (+$294.5 billion YTD), investors were split between their hunt for yield and finding a safe place to hide. The main attractors of investors’ assets were corporate investment-grade funds (+$191.0 billion), government-Treasury funds (+$34.5 billion), and flexible funds (+$23.3 billion). Balanced funds (-$14.6 billion) and corporate high-quality funds (-$449 million) suffered the only net redemptions of the group.

With the two main drags on performance being expenses and taxes (for those investors in taxable accounts), it’s not surprising to see municipal bond funds attracting net new money for the forty-ninth consecutive week during the Lipper fund-flows week as investors attempt to wring out every penny to prop up their after-tax returns. Year to date, municipal bond funds attracted a net $89.9 billion (their largest one-year net flows going back to 1992, when Lipper began to calculate weekly flows), with General & Insured Muni Debt Funds (+$28.6 billion), Intermediate Muni Debt Funds (+$22.2 billion), and High Yield Muni Debt Funds (+$18.5 billion) attracting the lion’s share of the YTD flows into the macro-group.

Despite the average equity fund, taxable fixed income fund, and tax-exempt fixed income fund posting year-to-date returns of 21.37%, 8.14% and 6.57%, respectively, investors have flocked to money market funds, injecting a net $530.9 billion into the group (their largest one-year net inflows since 2008).


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