January 7, 2021

U.S. Weekly FundFlows Insight Report: First Fund-Flows Week of 2021 May Signal Continuing Rotation

by Tom Roseen.

Investors were overall net redeemers of fund assets (including those of conventional funds and ETFs) for the first week in three. They withdrew $8.5 billion for Refinitiv Lipper’s fund-flows week ended January 6, 2021, despite pushing the Dow to another set of record closes during the week. Fund investors withdrew $5.4 billion from equity funds and a net $10.1 billion from money market funds. Meanwhile, investors were net purchasers of taxable and tax-exempt fixed income funds, injecting slightly less than $6.0 billion and $1.1 billion, respectively, this week.

Market Wrap-Up

The Dow and S&P 500 finished up the year in record territory as investors cheered the approval and roll-out of COVID-19 vaccines. However, in the first few days of 2021, concerns about a potential large rise in government borrowing costs to support another round of fiscal stimulus, the record growth in coronavirus hospitalizations and deaths, and the slow rollout of vaccines put investors on edge and pushed the 10-year Treasury yield above 1.00% for the first time since March.

On the domestic side of the equation, as investors continued their rotation out of the “stay-at-home” and large tech issues, the Russell 2000 Price Only Index (+3.49%) posted the strongest returns for the fund-flows week of the broadly followed U.S. indices. In contrast, the NASDAQ Composite Price Only Index (-1.00%) witnessed the only losses after posting an eyepopping 43.64% return in 2020 (its best one-year return since 2009). Overseas, the Shanghai Composite Price Only Index (+5.11%) witnessed the strongest plus-side weekly performance of the often-followed broad-based global indices, while the Nikkei 225 Price Only Index (-1.55%) witnessed the largest decline.

Despite a record number of COVID-19 hospitalizations reported on the last day of the year, investors pushed the Dow and the S&P 500 to record closes as investors embraced news of the onset of global vaccinations and first-time jobless benefits unexpectedly declined in the week prior. The average equity fund rung out the tumultuous year posting a handsome 15.63% return for 2020. The markets were closed on Friday, January 1, in observation of New Year’s Day.

On Monday, January 4, 2021, the U.S. market witnessed its worst one-day loss in more than two months as handwringing over rising interest rates roiled the markets. Despite Chicago Federal Reserve President Charles Evans stating it would take years to get the average inflation rate above 2%, investors feared that the massive amounts of federal stimulus already raised along with potential for more spending by President-elect Joe Biden’s administration could be inflationary. With polls leaning toward the Georgia runoff elections favoring Democrats gaining control of the Senate, investors also weighed the probable impact of Biden reversing 2017 tax cuts might have on corporate earnings and profitability. However, those concerns were short lived. On Tuesday, January 5, some pundits saw the benefits of the Democrats controlling the House, the Senate, and the presidency, betting that another large fiscal stimulus package would be enacted and that would shore up the economy. Investors also cheered the news that Institute for Supply Management said its manufacturing index rose to 60.7% in December, marking its highest level in more than two years and oil witnessed its largest one-day jump since early December after Saudi Arabia agreed to voluntary production cuts in February and March. On Wednesday, January 6, the AP called the Georgia elections for two U.S. Senate seats for Democrats, increasing the ability of a Biden administration to advance its agenda. Despite a reported siege at the U.S. Capitol disrupting the Congressional certification of Joe Biden’s electoral victory over President Donald Trump, the Dow once again closed at a record high. Many investors were saying that the shift in political power means more money spent on individuals and infrastructure projects. This “blue wave” and expected increase in government spending pushed the 10-year Treasury yield to 1.04%, its first close above 1% since March 19, 2020.

Exchange-Traded Equity Funds

Equity ETFs witnessed net inflows for the fourth week in a row—attracting $2.1 billion for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$1.2 billion), injecting money, also for the fourth week running. However, nondomestic equity ETFs witnessed net inflows for the third consecutive week in a row, taking in $926 million this past week. iShares Russell 2000 ETF (IWM, +$1.2 billion) and SPDR Gold ETF (GLD, +$1.1 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, Invesco QQQ Trust 1 ETF (QQQ, -$2.7 billion) experienced the largest individual net redemptions, and SPDR S&P 500 ETF (SPY, -$2.2 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the third week in four, taxable fixed income ETFs witnessed net outflows, handing back $436 million this last week. APs were net purchasers of corporate investment-grade debt ETFs (+$463 million) and flexible ETFs (+$323 million) while being net redeemers of government-Treasury ETFs (-$1.0 billion) and corporate high yield ETFs (-$358 million). iShares TIPS Bond ETF (TIP, +$265 million) and Invesco Senior Loan ETF (BKLN, +$205 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, -$908 million) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG, -$782 million) handed back the largest individual net redemptions for the week. For the eleventh week in a row, municipal bond ETFs witnessed net inflows, taking in $243 million this week.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net redeemers of equity funds for the second consecutive week, withdrawing $7.6 billion this week, with the macro-group posting a 1.00% market gain for the fund-flows week. Domestic equity funds, suffering net redemptions of slightly less than $4.9 billion, witnessed their second weekly net outflows while posting a 0.91% gain on average for the fund-flows week. Nondomestic equity funds—posting a 1.19% return on average—experienced their second week of net outflows in a row, handing back $2.7 billion this past week. On the domestic equity side, fund investors continued to shun large-cap funds (-$3.5 billion) and small-cap funds (-$1.0 billion). Investors on the nondomestic equity side were net redeemers of international equity funds (-$2.4 billion) and global equity funds (-$246 million).

Conventional Fixed Income Funds

For the third week in a row, taxable bond funds (ex-ETFs) witnessed net inflows—taking in $6.4 billion this past week—while posting a 0.19% return for the fund-flows week. Investors were net purchasers of corporate investment-grade debt funds (+$4.9 billion), international & global debt funds (+$507 million), and government-Treasury & mortgage funds (+$389 million) while being net redeemers of balanced funds (-$148 million). The municipal bond funds group posted a 0.39% return on average during the week and witnessed its ninth consecutive weekly net inflows, attracting $899 million this week.

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