March 6, 2020

Recent Market Volatility Pushes Fund and ETF Investors to the Sidelines

by Tom Roseen.

Wild market swings during the Lipper fund-flows week ended March 4, 2020, helped push investors toward money market funds. Even some traditional safe-haven plays didn’t attract investors’ assets during the week. The Dow and S&P 500 indices witnessed in three of its five trading days market moves that exceeded 4% in either direction as trepidations of the coronavirus’ impact on global trade were partially offset by central bank intervention.

For the fund flows week, investors were net purchasers of money market funds (+$38.5 billion), but were net redeemers of equity funds (-$20.3 billion), taxable fixed income funds (-$8.9 billion), and municipal bond funds (-$250 million, their first net outflows in 61 weeks).

While in 2019, investors in search of yield were willing to put risk in their portfolios—padding the coffers of high-yield funds (including ETFs) to the tune of $18.9 billion (the group’s strongest one-year net inflows since 2012)—they have now become net redeemers in 2020, withdrawing $6.8 billion so far this year. Historically, flows and returns for high-yield funds are generally highly correlated to those of equity funds.

So, given the meltdown in equity funds and ETFs over the past two weeks, in which we have seen a combined $42 billion in outflows, it’s not too surprising to see corporate high-yield funds hand back a combined $9.3 billion over the last two weeks. High-yield funds suffered their fourth largest weekly outflows (-$5.1 billion) on record this past fund-flows week dating back to 1992.

While not seen traditionally as safe-haven plays, investors were net redeemers of corporate investment-grade debt funds (-$4.8 billion, their largest weekly net redemptions since May 29, 2019, and first weekly outflows since January 1) and, as mentioned before, municipal bond funds (-$250 million).

As one might expect during a period of high anxiety, government-Treasury funds (including ETFs) attracted some $4.9 billion this past fund-flows week, while government Treasury & mortgage funds took in $428 million. And while there was a large move toward money market funds this week (+$38.5 billion), that trend was a continuation from 2019. It was a period in which fund investors, despite strong equity returns, had squirreled away $541.6 billion—the largest one-year total for money market fund net inflows since 2008—perhaps in anticipation of a market downturn. Despite the recent 50-basis-point interest rate cut applied by the Federal Reserve Board, which was a boon for investors in most bond funds, many folks just decided it was best to sit on the sidelines.

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