March 26, 2021

ETF and Conventional Mutual Fund Investors Take Divergent Paths for the Week and Year to Date

by Tom Roseen.

Increased market volatility and overall global uncertainty appears to be keeping many U.S. mutual fund investors on the sideline so far this year. Notwithstanding the average equity fund chalking up a respectable 4.86% return year to date through the Refinitiv Lipper fund-flows week ended Wednesday, March 24, 2021, investors have redeemed $83.0 billion from equity funds (excluding ETFs) during the same period.

Despite inflationary fears, a steepening Treasury yield curve—which generally leads to related performance losses—and the average fixed income mutual fund posting a 1.20% year-to-date loss, mutual fund investors injected a net $94.6 billion into conventional taxable bond funds and an additional $21.7 billion into conventional municipal bond funds so far this year.

However, fund investors continued to pad the coffers of money market funds, injecting $131.1 billion year to date, with a large chunk of that amount being injected this week. For the most recent fund-flows week fund investors inserted $59.3 billion into money market funds, their largest weekly purchase since April 29, 2020, when burgeoning COVID-19 concerns were at the forefront of investors’ thoughts.

A new round of COVID-19 lockdowns were reinstituted in a few European countries this past week as the number of coronavirus cases were on the rise globally, including in some U.S. states as well. This has put some investors back on their heels and pressured recent rotation winners, with value-oriented, energy-related, and small-cap issues taking the brunt of the beatdown this week. The Russell 2000 Index (-8.65%) suffered the largest market losses of the broadly followed U.S. indices for the fund-flows week.

While for the week mutual fund investors (ex-ETFs) were net redeemers of equity funds, withdrawing a net $3.4 billion, large-cap funds witnessed the largest net redemptions, handing back $3.0 billion. Meanwhile, small-cap funds only witnessed $364 million in outflows. Fund investors were net purchasers of taxable bond funds (+$4.2 billion), extending their winning streak to 14 consecutive weeks, and municipal bond funds took in $367 million.

Despite the Federal Reserve Board reiterating its collective view that it doesn’t expect to tighten monetary policy until 2024 at the earliest, bond investors continued to push interest rates higher during the week, with the 10-year Treasury yield rising to 1.74% on March 19 (its highest close since January 23, 2020) before settling at 1.62% at the end of the fund-flows week.

Although ETF investors kept the pedal to the metal this week, injecting $14.3 billion into equity ETFs (bringing the group’s weekly net inflows streak to the seventh week in a row), they were net redeemers of taxable bond ETFs. However, they withdrew only $232 million for the week. For the fourth consecutive week, investors were net purchasers of municipal bond ETFs (+$226 million). Year to date, ETF investors have injected a net $158.6 billion into equity ETFs, $26.1 billion into taxable bond ETFs, and $4.5 billion into municipal bond ETFs.

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