February 25, 2021

U.S. Weekly FundFlows Insight Report: For the Second Week in a Row, Both Equity ETFs and Funds Take in Net New Money Despite Inflationary Concerns

by Tom Roseen.

Investors were overall net purchasers of fund assets (including those of conventional funds and ETFs) for the third consecutive week. They injected $32.7 billion for Refinitiv Lipper’s fund-flows week ended February 24, 2021. Fund investors padded the coffers of equity funds (+$15.4 billion), money market funds (+$13.2 billion), taxable bond funds (+$4.1 billion), and tax-exempt fixed income funds (+$38 million) for the week.

Market Wrap-Up

The broad-based U.S. indices ended the fund-flows week mixed as investors kept a keen eye on weakness in the labor market and the potential for higher borrowing costs.

On the domestic side of the equation, the Dow Jones Industrial Average Price Only Index (+1.10%) posted the strongest one-week returns of the other broadly followed U.S. indices—closing the fund-flows week in record territory—followed by the Russell 2000 Price Only Index (+1.25%). The NASDAQ Composite Price Only Index (-2.63%) witnessed the largest declines for the flows week as investors continued to rotate into cyclical stocks and away from the high-flying tech issues. Overseas, the Xetra DAX Total Return Index (+1.23%) posted the strongest returns of the other often-followed broad-based global indices, while the Shanghai Composite Price Only Index (-2.72%) suffered the largest declines.

On Thursday, February 18, 2021, the U.S. stock indices closed down marginally on the day as investors looked for other catalysts that could propel stocks higher in the face of rising bond yields, elevated energy and commodity prices, and a worsening of new weekly initial jobless claims, which rose to their highest level in a month. Brutally cold weather in places such as Texas pushed natural gas and crude oil prices to their highest level in more than a year. Despite learning of a 44% decline in reported COVID-19 cases from the average two weeks ago and a better-than-expected flash reading from the IHS Markit purchasing managers index for services and manufacturing on Friday, February 19, investors remained pensive, maintaining their focus on labor market weakness and rising bond yields. The 10-year Treasury yield rose 5.8 basis points (bps) to close the day at 1.345%, contributing to its sharpest weekly rise since January. The S&P 500 booked its longest losing streak in two months. However, near-month crude oil futures declined 2.1% to $59.24/barrel (bbl).

The NASDAQ declined 2.5% and the S&P 500 booked its fifth daily loss on Monday, February 22, 2021, while investors continued to worry about rising bond yields. The 10-year Treasury yield rose 2.6 bps to 1.37% after U.S. near-month crude oil futures rose 4.1% on the day to close at $61.70/bbl, pushing energy shares higher. However, the S&P 500 booked its strongest one-day turnaround on Tuesday, February 23, after Federal Reserve Chair Jerome Powell vowed to Congressional leaders he intended to keep monetary policy accommodative, noting that the “economy is a long way from our employment and inflation goals.” On Wednesday, February 24, near-month crude oil futures settled above $63/bbl for the first time in 13 months and the Dow closed out the fund-flows week at a record high, just missing the 32,000 mark. Markets continued to rally after Powell’s second day of testimony on Capitol Hill emboldened stock market bulls. The 10-year Treasury yield finished the day up 2.5 bps at 1.388% as inflation fears continued to rise after Fed Governor Lael Brainard emphasized the need for continued fiscal and monetary support for the U.S. economy and oil futures rose to a 13-week high, settling at $63.22, even after data showed U.S. crude oil supplies rose.

Exchange-Traded Equity Funds

Equity ETFs witnessed their third consecutive week of net inflows—attracting $16.6 billion for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$15.6 billion), injecting money, also for the third week in a row. Nondomestic equity ETFs witnessed net inflows for the tenth week running, attracting $927 million this past week. iShares Core S&P 500 ETF (IVV, +$2.5 billion) and SPDR S&P 500 ETF (SPY, +$2.2 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR Gold ETF (GLD, -$1.5 billion) experienced the largest individual net redemptions, and Technology Select Sector SPDR ETF (XLK, -$525 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the second week in row, taxable fixed income ETFs witnessed net outflows, handing back $2.2 billion this last week. APs were net purchasers of international & global debt ETFs (+$221 million) and government-mortgage ETFs (+$174 million) while being net redeemers of corporate high-yield ETFs (-$1.6 billion), corporate investment-grade debt ETFs (-$701), and flexible ETFs (-$249 million). Loan Participation ETFs, a component of the corporate investment-grade ETFs macro-group, took in $152 million for the flows week, marking their sixteenth consecutive week of net inflows, while Inflation Protected Bond ETFs attracted $755 million. iShares 1-3 Year Treasury Bond ETF (SHY, +$370 million) and iShares Core US Aggregate Bond ETF (AGG, +$363 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, SPDR Bloomberg Barclays High Yield ETF (JNK, -$1.8 billion) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, -$1.6 billion) handed back the largest individual net redemptions for the week. For the first week in 18, municipal bond ETFs witnessed net outflows, handing back $327 million.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net purchasers of equity funds for the second week in a row, though they injected just $552 million this week, with the macro-group posting a 0.54% market loss for the fund-flows week. Domestic equity funds, suffering net redemptions of slightly less than $1.3 billion, witnessed their ninth weekly net outflows while witnessing a 0.07% loss on average for the fund-flows week. Nondomestic equity funds—posting a 1.54% weekly loss on average—witnessed their third consecutive week of net inflows, taking in $1.8 billion this past week. On the domestic equity side, fund investors continued to shun large-cap funds (-$1.9 billion) but directed money toward equity income funds (+$238 million) and small-cap funds (+$209 million). Investors on the nondomestic equity side were net purchasers of international equity funds (+$1.6 billion) and global equity funds (+$194 million).

Conventional Fixed Income Funds

For the tenth week in a row, taxable bond funds (ex-ETFs) witnessed net inflows—taking in $6.2 billion this past week—while suffering a 0.29% decline for the fund-flows week. Investors were net purchasers of corporate investment-grade debt funds (+$4.9 billion), flexible funds (+$1.3 billion), and government-Treasury funds (+$515 million) while being net redeemers of corporate high-yield funds (-$649 million) and government-mortgage funds (-$327 million). The municipal bond funds group posted a 1.31% loss on average during the week, yet it witnessed its sixteenth consecutive weekly net inflows, attracting $365 million this week. General & Insured Municipal Debt Funds was the big attractor of investors’ assets for the week, taking in $403 million, while High Yield Municipal Debt Funds (-$317 million) experienced the largest outflows of the group.

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