May 15, 2020

A Tale of Two Investment Vehicles: Estimated Net Flows for Conventional Funds Versus ETFs

by Tom Roseen.

Year-to-date estimated net flows into conventional mutual funds and exchange-traded funds continue to tell a mixed story. Through the Lipper fund-flows week ended Wednesday, May 13, 2020, investors continued to inject net new money into the business, bringing the year-to-date total to $871.6 billion. Flow trends, however, are quite different for conventional mutual funds and ETFs.

While conventional mutual funds have attracted some $798.8 billion year to date, the short-term asset class—money market funds—was the only recipient of net new money. These funds took in a record setting $1.1 trillion—beating any full-year estimated net flows in history. The only years that come even close were 2007 (+$720.4 billion) and 2008 (+$687.9 billion).

Interestingly, the flows above indicate that investors truly are still in a savings mindset but appear to be waiting for better days to put their money to work in other asset classes. So far this year, conventional equity mutual funds have handed back $115.6 billion, with large-cap funds accounting for $82.3 billion of those net outflows. Meanwhile, international equity funds (+$6.8 billion) and sector-technology funds (+$689 million) took in the largest net flows of conventional equity mutual funds.

Over the last 10-plus years, mutual fund investors were enamored of fixed income funds, redeeming money only in 2015 (-$51.6 billion) and 2018 (-$10.3 billion). However, so far this year, they have become net redeemers of the asset class, removing a net $139.0 billion through May 13 as investors ducked for cover given the economic fallout from COVID-19 on corporations globally and concerns of credit quality and viability going forward. Municipal bond funds (-$24.9 billion year to date) have suffered a comparable fate as well for similar reasons.

In contrast, exchange-traded funds have been attractors of investors’ money, taking in a net $84.8 billion year to date. All three asset classes in the ETF universe are in positive territory for estimated net flows so far this year, with equity ETFs attracting a net $39.8 billion, taxable bond ETFs taking in $44.4 billion, and municipal bond ETFs witnessing net inflows of $624 million.

Not surprisingly, large-cap ETFs (+$33.2 billion) were the main attractor of investor assets in the equity space, with Vanguard 500 Index ETF (VOO) taking in the largest amount of net new money year to date, $15.1 billion, followed by Invesco QQQ Trust 1 ETF (QQQ), attracting $10.0 billion, and Vanguard Total Stock Market Index ETF (VTI) taking in $9.7 billion.

On the taxable bond side, government-Treasury ETFs (+$17.4 billion) had the largest draw of net new money year to date (although in recent weeks investors have become more risk/yield seeking), with SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) taking in the largest sum (+$9.4 billion), followed by iShares iBoxx $ Inv Grade Corporate Bond ETF (LQD), which attracted some $9.2 billion year to date.

Combining the year-to-date estimated net flows of conventional mutual funds and ETFs, we see that investors are sitting on the sidelines after being net redeemers of equity funds and ETFs (-$75.9 billion), fixed income funds and ETFs (-$139.0 billion), and municipal bond funds and ETFs (-$24.2 billion) year to date. Investors appear, however, to be prepared to put money back to work in the coming months or years after padding the coffers of money market funds with an additional $871.6 billion after accounting for the influx of money into the asset class from net redemptions of the others.

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