February 19, 2021

ETF and Mutual Fund Investors Embrace Sector Equity Funds in the Beginning of 2021

by Tom Roseen.

Despite mixed market results for the Refinitiv fund-flows week ended Wednesday, February 17, 2021, investors were net purchasers of long-term fund and ETF assets, injecting a net $9.6 billion into equity funds, $5.7 billion into taxable bond funds, and slightly less than $2.0 billion into tax-exempt bond funds.

For the first week in 17, the Dow Jones Industrial Average Price Only Index (+0.56%) rose to the top of the leaderboard of the broadly followed U.S. indices, posting the strongest returns for the fund flows week, while the recent favorite—the Russell 2000 Price Only Index (-1.15%)—experienced the largest one-week decline.

The sector-technology funds (+$3.3 billion) macro-group was the primary attractor of investors’ assets for the most recent flows week, with Science & Technology Funds (and ETFs) taking in $2.0 billion, Global Science & Technology Funds attracting $1.2 billion, and Telecommunication Funds drawing a net $137 million. The large-cap funds macro-group (+$1.9 billion) took in the next largest draw for the week, for their second consecutive weekly net inflows after suffering weekly net outflows in each week of the new year, followed by the international equity funds (+$1.4 billion) macro-group.

Despite relatively strong market returns year-to-date, with the average equity mutual fund posting a 6.37% return, equity funds and ETFs have only attracted a net $12.6 billion, while taxable and tax-exempt bond funds have taken in $97.5 billion and $21.0 billion, respectively, for comparison.

Nonetheless, the recent rotation into more out-of-favor issues continued. Year to date, the main attractor of investors’ assets were sector-technology funds and ETFs (+$13.9 billion), sector-other funds (+$9.8 billion, primarily made up of commodity fund classifications), sector-energy funds (+$9.3 billion), and sector-finance/banking funds (+$7.7 billion).

Recent frigid weather in the U.S. lifted energy stocks and a rise in yield, perhaps due to the burgeoning U.S. fiscal debt, was a tailwind for banking stocks. Energy stocks got a shot in the arm during the flows week as natural gas prices soared after a cold snap left millions of Texans without electricity or heat and near-month crude oil prices rose above $60/barrel. Late in the week, the bond market came under pressure as the 10-year Treasury yield rose to a one-year high of 1.30% as investors continued to assess what the impact of an additional $1.9 trillion of debt will be on the economy and lending.

In fact, year to date, flows into all the sector-equity macro-groups (+$41.1 billion) accounted for the supermajority of net new money entering the business, while the large- and mid-cap funds macro-groups suffered the largest net redemptions, handing back $39.5 billion and $2.5 billion, respectively.

From an individual classification perspective, Science & Technology Funds (+$9.2 billion) attracted the largest sum of net new money, followed by Financial Services Funds (+$7.5 billion), Alternative Energy Funds (+$5.5 billion), Global Science & Technology Funds (+$5.4 billion), and Industrials Funds (+$3.8 billion).

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