Investors Rediscover Financial Services Funds in Q1

Lipper’s Financial Services Funds peer group (including both mutual funds and ETFs) took in $407 million of net new money for the fund-flows week ended Wednesday, February 12. This pushed the group’s year-to-date flows into positive territory (+$341 million). This may seem like a modest increase, but the financial services group is coming off its two worst annual net outflows ever (Lipper began tracking flows data in 1992), as $11.1 billion and $10.1 billion left the group’s coffers in 2019 and 2018, respectively.

Financial stocks (and therefore funds) are impacted by the state of the economy as well as interest rates. These two factors contributed to investors pulling money out of financial services funds during 2018 and 2019. The Federal Reserve embarked on an interest rate cutting program in 2019 as it reduced the Federal funds rate three separate times. This is a negative for the financial sector because as interest rates decline, banks (and other financial institutions) earn less on the money they lend out. The economy also held back financial services since the markets were expecting an end to the unprecedented economic expansion in the U.S. and the negative impact (both actual and forecasted) of the U.S.-China trade war.

These impediments have lessened somewhat in 2020. The Fed announced that it will need to have supporting economic data before making any additional rate cuts. The Fed also said it believes the probability of a recession in the U.S. has declined. Sino-American trade tensions have also eased, as the two signed a phase-one trade deal in January.

Despite these positive indicators, it has been an up-and-down year so far for the financial services group, as it has experienced as many weekly net outflows (three) as it has net inflows. This is possibly due to the concerns about the negative impact that the coronavirus outbreak might have on the global economy. But financial services funds did experience the group’s best one-week flows result in more than two years for the fund-flows week ended January 8, as it had positive net flows of $996 million. The net inflows this week were driven by the Financial Select Sector SPDR ETF (XLF), which took in $920 million of net new money. This was the group’s best one-week net inflow since the fund-flows week ended December 6, 2017 (+$1.9 billion).