May 14, 2020

U.S. Weekly FundFlows Insight Report: ETF and Fund Investors Embrace Fixed Income Securities During the Week

by Tom Roseen.

For the eleventh consecutive week, investors were overall net purchasers of fund assets (including those of conventional funds and ETFs), injecting $28.7 billion for Lipper’s fund-flows week ended May 13, 2020. Fund investors were net purchasers of money market funds (+$20.3 billion), taxable fixed income funds (+$10.4 billion), and municipal bond funds (+$582 million), while being net redeemers of equity funds (-$2.5 billion) this week.

Market Wrap-Up

For the fund-flows week ended May 13, 2020, markets were mixed as the Q1 earnings season neared its end, investors watched state governors cautiously reopen their economies, and Federal Reserve Chair Jerome Powell gave a dour near-term outlook for the economy.

The NASDAQ Price Only Index (+0.10%) witnessed the only plus-side return for the fund-flows week of the broadly followed U.S. indices, followed by the S&P 500 Price Only Index (-1.00%). The Russell 2000 Price Only Index suffered the largest decline of the flows week, declining 2.36%. Overseas, the Nikkei 225 Price Only Index (+2.27%) chalked up the strongest plus-side returns of the often-followed broad-based global indices, while the FTSE 100 Price Only Index (-0.25%) suffered the largest losses for the week.

On Thursday, May 7, despite a report showing that in the week prior 3.2 million more Americans were added to the role of first-time jobless claims, a continued rally in technology stocks pushed the NASDAQ back into positive territory year to date. Also, investors appeared to believe the pace of job losses were on the mend as some states moved to a soft reopening of their economies. On another positive note, a recently released report showed that Chinese exports unexpectedly grew 3.5% from the previous year compared to analyst expectations of a 15.7% decline.

Shrugging off a disappointing April nonfarm payrolls report released on Friday, May 8, the DJIA closed the day up 455 points (+1.91%) and was up 2.56% for the week as some pundits felt the jobs numbers were better than expected. Many also felt that the majority of the jobs lost were just temporary. A U.S. Department of Labor report showed the U.S. economy lost 20.5 million jobs in April (slightly lower than 22 million expected by economists), with the unemployment rate rocketing to 14.7%, its highest rate since the Great Depression (which was estimated at 25%). Many also pointed to the extraordinary measures taken by both the Fed and the U.S. government for the upward market trend. Market sentiment was also buoyed by news that the U.S. and China agreed to improve macroeconomic and public health collaboration.

However, on Monday, May 11, U.S. stocks were mixed as skepticism grew over reopenings. Despite a commitment by the Fed’s vice chair Randal Quarles that the central bank will use all of its firepower to protect the U.S. banking system from the COVID-19 crisis, many investors were concerned a hasty reopening might lead to a second waver of infections. In addition, as the Q1 earnings season nears its end, investors began to evaluate what a 12.2% aggregate decline in earnings might mean to current valuations.

On Tuesday, the Dow witnessed its largest one-day slump since May 1, and the NASDAQ broke a six-day winning streak as investors kept a keen eye on the efforts to reopen the economy and increasing tensions between Washington and Beijing. Investors showed some concern after learning that new clusters of the coronavirus emerged in countries that began to ease restrictions on business activities and after Dr. Anthony Fauci warned the country might face “needless suffering and death” by reopening too soon during his testimony to the Senate. However, bond ETFs got a shot in the arm on Tuesday after the Fed stepped into the market to keep credit flowing by providing liquidity.

On Wednesday, the U.S. stock market took it on the chin, with the DJIA declining 2.17% after Federal Reserve Chair Powell provided a foreboding near-term economic outlook stating the speed and scope of the downturn were significantly worse than any recession since World War II. He suggested additional government aid to households and businesses may be needed to ward off long-term economic damage.

Exchange-Traded Equity Funds

For the third consecutive week, equity ETFs witnessed net outflows, handing back $1.1 billion for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$3.2 billion), injecting net new money for the fifth week in six. However, nondomestic equity ETFs witnessed their twelfth week of net outflows, handing back $4.3 billion this past week. SPDR S&P 500 ETF (SPY, +$3.5 billion) and Invesco QQQ Trust 1 ETF (QQQ, +$1.1 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, iShares Russell 2000 ETF (IWM, -$1.9 billion) experienced the largest individual net redemptions, and iShares MSCI Emerging Markets ETF (EEM, -$1.1 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the seventh week in a row, taxable fixed income ETFs witnessed net inflows, taking in $3.7 billion this last week. APs were net purchasers of corporate investment-grade debt ETFs (+$1.4 billion), flexible ETFs (+$1.3 billion), and corporate high-yield debt ETFs (+$918 million), while being net redeemers of government-Treasury ETFs (-$344 million). iShares iBoxx $ High Yield Corporate Bond ETF (HYG, +$830 million) and iShares Core U.S. Aggregate Bond ETF (AGG, +$739 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares 20+ Year Treasury Bond ETF (TLT, -$430 million) and iShares 7-10 Year Treasury Bond ETF (IEF, -$377 million) handed back the largest individual net redemptions for the week. For the second consecutive week, municipal bond ETFs witnessed net inflows, taking in $199 million this week.

Conventional Equity Funds

For the third week in a row, conventional fund (ex-ETF) investors were net redeemers of equity funds, withdrawing $1.4 billion, while posting a 0.45% loss for the flows week. Domestic equity funds, taking in just $29,407, witnessed their first weekly net inflows in three while posting a 0.91% market decline on average for the fund-flows week. Nondomestic equity funds—posting a 0.56% gain on average—experienced their sixth consecutive weekly net outflows, handing back $1.4 billion this past week. On the domestic equity side, fund investors continued to shun large-cap funds (-$672 million) but padded the coffers of sector-technology funds (+$796 million), while investors on the nondomestic equity side were net redeemers of international equity funds (-$1.1 billion).

Conventional Fixed Income Funds

For the fifth week in a row, taxable bond funds (ex-ETFs) witnessed net inflows—taking in $6.7 billion this past week—while posting a 0.06% return for the fund-flows week. Investors were net purchasers of corporate investment-grade debt funds (+$3.8 billion) and corporate high-yield debt funds (+$3.6 billion), while government-mortgage funds (-$443 million), flexible funds (-$415 million), and international & global debt funds (-$182 million) witnessed the largest net outflows of the group. For the first week in three, municipal bond funds (ex-ETFs) witnessed net inflows—taking in $383 million—while posting a 0.47% return on average for their second straight weekly market gain.

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