January 8, 2021

Year-End Rotation into Out-of-Favor Issues?

by Tom Roseen.

Despite a horrible first quarter in 2020, when the average equity and fixed income fund (including ETFs) lost 22.33% and 4.56%, respectively, both asset classes were able to finish the year on strong footing, posting one-year returns of 15.63% and 5.28%, respectively. Even the average mixed-asset (target date and target risk) fund managed to put together a handsome 12.26% one-year return. Not bad considering the ground that needed to be retraced before the funds could move into positive territory.

However, there is still a ton of cash sitting on the sidelines, waiting for the other proverbial shoe to drop. By December 31, 2020, estimated net flows into U.S. domiciled money market funds had reached $653.9 billion (based on preliminary year-end numbers), down from the $1.120 trillion pinnacle reached in May.

Conventional fund investors appeared to shrug off the strong rebound in equities, redeeming a net $532.6 billion during 2020, with conventional large-cap funds (-$295.1 billion) suffering the largest exodus (in spite of the average large-cap fund returning 21.78% for the year), bettered by international income funds (-$119.6 billion) and small-cap funds (-$32.3 billion). Conventional fixed income funds continued to attract net new money during 2020, with taxable bond funds taking in $105.6 billion and tax-exempt bond funds attracting some $26.9 billion.

However, exchange-traded funds continued to be the go-to instrument for all the asset classes. For 2020, equity ETFs took in $196.7 billion, while their taxable and tax-exempt fixed income counterparts attracted $178.7 billion (their largest one-year net inflow going back to 2002, when the first fixed income ETF began trading) and $12.0 billion, respectively.

As reported in the mainstream media over the last half of the year, much of the rally in equities was attributed to large tech and “stay-at-home” stocks. But since the creation and recent distribution of a COVID-19 vaccine and reopening of the global economies (albeit in fits and starts), a rotation out of the high-flying tech issues and into more out-of-favor stocks has begun.

Focusing just on flows into ETF classifications, we saw that in December Emerging Markets ETFs witnessed the largest draw of net new money, taking in some $6.8 billion for the month, followed by Multi-Cap Core ETFs (+$6.2 billion), and Small-Cap Core ETFs (+$6.1 billion). Sure, Science & Technology ETFs (+$4.8 billion) and Health/Biotechnology ETFs (+$3.6 billion) were still at the top of list, but it appears that investors are actively testing the water of the mid-year, out-of-favor classifications.

The five-top ETF attractors of investors’ assets in December were Vanguard Total Stock Market Index ETF (VTI, +$5.3 billion), iShares Core MSCI Emerging Markets ETF (IEMG, +$3.6 billion), iShares Russell 2000 ETF (IWM, +$3.2 billion), ARK Innovation ETF (ARKK, +$2.9 billion), and ARK Genomic Revolution ETF (ARKG, +$2.8 billion)

For the last month of the year, the favored darlings of 2020—S&P 500 Index ETFs (-$13.5 billion) and Large-Cap Core ETFs (-$4.9 billion)—witnessed the largest net outflows. A couple of interesting year-end observations to note, as might be expected with the recent change in political power in the U.S., Inflation Protected Bond ETFs got a little attention, taking in $2.3 billion for December, while Loan Participation ETFs (aka leverage loan funds) attracted some $808 million for the month.

Find out more about Refinitiv Lipper, one of the global leaders in independent fund performance data.

Get In Touch


We have updated our Privacy Statement. Before you continue, please read our new Privacy Statement and familiarize yourself with the terms.×