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March 20, 2020

Funds and ETFs Witness Record Breaking Outflows During the Week

by Tom Roseen.

Most investors watched the equity markets take a drubbing with some degree of trepidation after a week of record-setting losses. Governments worldwide instituted travel restrictions, requested citizens to institute social distancing, banned gatherings of more than 10 people, closed public-facing businesses, and in some cases, issued shelter-in-place orders for the next few weeks as citizens around the world begin to grasp the severity of the coronavirus and its insidious spread.

The broader implications such closures and restrictions would have on equity markets were somewhat predictable, with the Russell 2000 Price Only Index (-21.60%) suffering the largest declines of the broadly followed U.S. indices for the fund-flows week ended March 18, 2020. It was bettered by the Dow Jones Industrial Average Price Only Index (-15.52%), while the NASDAQ Composite Price Only Index (-12.10%) mitigated losses slightly better than others in the group.

However, the potential increase in debt default because of these closures have led many investors now to question the credit worthiness of corporations (especially those highly leveraged) and municipalities, leading to unusual market declines and record outflows during the week.

For the week, the average taxable bond fund lost a whopping 6.81%, with Flexible Income Funds, Loan Participation Funds, and Emerging Markets Hard Currency Debt Funds suffering the largest declines of the group, losing 19.38%, 10.25%, and 12.86%, respectively. Meanwhile, the average municipal bond fund lost 4.75% for the week, with High Yield Municipal Debt Funds (-7.04%) suffering the largest performance decline of the group.

As might be expected given the related flight to safety, for the Lipper fund-flows week ended March 18, 2020, fund investors were net purchasers of money market funds (+$148.0 billion, their largest weekly net inflow on record going back to 1992). However, taxable fixed income funds (including ETFs) and municipal bond funds suffered record-setting weekly net outflows of $55.9 billion and $12.2 billion, respectively, while equity funds handed back some $14.8 billion this week.

While equity funds (-$14.8 billion) witnessed net outflows for the week, the breakout tells a slightly different story. Equity ETFs attracted net new money, taking in some $1.9 billion, while their conventional fund counterparts handed back $16.7 billion.

However, it was somewhat different on the taxable fund side, where taxable bond ETFs handed back their largest one-week net redemption on record, accounting for $13.2 billion of the combined $55.9 billion of net outflows, as investors questioned the credit worthiness of corporations ahead of a prolonged lockdown. The ever-popular corporate investment-grade funds macro-group (-$35.6 billion) handed back the lion’s share of net redemptions in the taxable fixed income universe during the week, with ETF and conventional fund investors withdrawing $10.9 billion and $24.7 billion, respectively—both were record weekly amounts. The next largest net outflows for the fund-flows week were witnessed by flexible funds (including ETFs), handing back a combined $8.6 billion, bettered by international & global debt funds (-$4.2 billion).

After a 60-week inflows run that attracted record net inflows for 2019, municipal bond funds (including ETFs) suffered net redemptions over the last three fund-flows weeks, this week handing back a record $12.2 billion and posting its worst one-week return (-4.75%) since October 15, 2008, when municipal bond funds lost 5.61%. Conventional municipal bond funds handed back $11.5 billion for the week, while their ETF counterparts suffered net redemptions of $669 million, both record weekly amounts. As might be expected, High Yield Municipal Debt Funds (including ETFs) witnessed the largest net outflows this week, handing back $5.3 billion (their largest weekly net outflows going back to 1992), bettered by General & Insured Municipal Debt Funds, which suffered $2.8 billion in net redemptions for the week, also a record amount.

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