June 25, 2021

U.S. Weekly FundFlows Insight Report: Financial/Banking ETFs Record Largest Weekly Outflow on Record as Tech Returns to Limelight

by Jack Fischer.

During Refinitiv Lipper’s fund-flows week ended June 23, 2021, investors were overall net redeemers of fund assets (including both conventional funds and ETFs) for the second week in a row, withdrawing $15.4 billion.

Money market funds (-$29.9 billion) were the sole driver in weekly net outflows, while equity funds (+$10.0 billion), taxable bond funds (+$2.7 billion), and tax-exempt bond funds (+$1.9 billion) all attracted new money.

Disclaimer: Several American Funds paid out long-term capital gains and income distributions, going ex-dividend on Wednesday, June 16th, which were reflected by a drop in their total net assets for the day. This led to temporary weekly outflows last week. The supermajority of those distributions was reinvested on June 17th, reversing the outflows, and are shown as net inflows this week.

Market Wrap-Up

At the close of Refinitiv Lipper’s fund-flows week, U.S. broad-based indices traded mixed as overseas indices ended the week in the red. The NASDAQ (+1.65%) and S&P 500 (+0.43%) appreciated over the last five trading sessions—these two indices have recorded six straight weeks of positive performance. The DJIA (-0.47%), Russell 2000 (-0.48%), Dax 30 (-3.01%),  and FTSE 100 (-2.48%) each logged negative weekly returns. The largest contribution to the S&P 500 return was attributed to the growth component returning +2.12% on the week. Growth and technology securities have performed well this month as there appears to be an unwinding of the reflation trade. The 10-two Treasury yield spread fell 10.19% on the week—shorter-dated Treasury yields outpaced their longer-dated counterparts. The flattening of the yield curve often signals investors are forecasting future economic contraction.

Our fund-flows week kicked off Thursday, June 17, with U.S. equity markets trading sideways. Commodities and reopening stocks took a hit as growth and technology stocks fared better. China announced its plan to start delivering industrial metals out of its government reserves which will help to deflate some upward pressure on prices. The Federal Reserve noted inflation could end up one full percentage point higher than their forecast just three months ago, around 3.4%.

On Friday, June 18, equity markets stumbled with the Russell 2000 (-2.17%) recording the largest daily loss of the week—marking its fifth straight day of negative performance. James Bullard, president of the Federal Reserve Bank of St. Louis, voiced comments that took center stage to end the calendar week. Bullard, who will become a voting member on the Federal Open Market Committee (FOMC) in 2022, foresees an initial interest rate increase in 2022—ahead of many of his peers who have penciled in two hikes by the end of 2023. Bullard also stated his support to slow the central bank’s asset-buying program, in particular the $40 billion each month of mortgage-backed securities. The 10-year Treasury yield ended Friday’s volatile session at its lowest level since early March, while the two-year Treasury yield (+21.13%) and the VIX (+17.13%) significantly jumped. The 10-two Treasury yield spread suffered its largest daily decline (-8.17%) since early last November.

Markets bounced back in a big way Monday after an erratic end to the week. U.S. equity markets all finished in the black. The Russell 2000 (+2.16%) led the way, followed by the DJIA (+1.76%)—the largest daily return for the DJIA since early March. After appreciating four straight days, the United States Dollar Index (DXY) finally saw a drawback (-0.35%). As the dollar weakened, commodities saw a slight bounce again with oil and heavy metal prices moving higher.

On Tuesday, June 22, we heard yet again from Federal Reserve Chair Jerome Powell. This time Powell was speaking with the House Select Subcommittee on Coronavirus Crisis. To no one’s surprise, he reiterated his opinion of the transitory nature of the current inflationary pressures and suggested once again that interest rates will not increase solely due to the fear of possible inflation. The NASDAQ ended the day on a new record high while the other U.S. equity indices finished slightly positive.

Wednesday, June 23, ended our Refinitiv Lipper fund-flows week. U.S. equity markets traded mixed again while yields across the Treasury curve slightly increased. Investors anxiously awaited the Federal Reserve’s findings on their annual stress test of banks which came out today. The two-year Treasury yield jumped 11.02% on the day.

Exchange-Traded Equity Funds

Exchange-traded equity funds recorded $2.84 billion in weekly net outflows. This is the macro-group’s third weekly outflow in the last six weeks. After returning negative 0.30%, on average, over the last week, equity ETFs posted their lowest weekly outflow in 35 weeks.

Sector-technology ETFs (+$738 million) and sector-real estate ETFs (+$669 million) were the two largest attractors of flows in the equity ETF universe. After this week’s inflow, sector-technology ETFs have recorded only two weekly inflows in the last 10 weeks. Technology and growth equities have returned to the limelight even though the Federal Reserve has been “talking about talking about” rate hikes happening sooner than its March forecasts. Despite a negative performing week (-0.42%), sector-real estate ETFs logged its fourth straight week of positive inflows. Real estate was a good bet in the inflation-heavy 1970s and it appears investors are betting on history repeating.

On the flip side, sector-financial/banking ETFs (-$2.5 billion) and sector-other ETFs (-$1.4 billion) suffered the largest subgroup outflows for the week. Sector-financial/banking ETFs recorded their largest weekly outflow to date. The outflow from sector-financial/banking can be seen as an unwinding of the reflation trade and possibly a flattening of the yield curve outcome. Financial institutions that borrow in the short term and lend over longer periods have been hurt this week as the two-year Treasury yield rose 27.8% while the 10-year fell 5.2%. The outflows also come on the heels of the annual bank stress tests done by the Federal Reserve.

Sector-other ETFs also witnessed significant weekly outflows. The $1.4 billion of outgoing money marks the first weekly outflow in 13 weeks. The sub-group, on average, returned a negative 2.30%. Looking under the hood, many of the larger outflows were attributed to raw material funds.

Over the past fund-flows week, the top two equity ETFs in weekly inflows were SPDR S&P 500 ETF (SPY, +$1.7 billion) and Invesco QQQ Trust 1 (QQQ, +$1.4 billion). Meanwhile, two equity ETFs saw outflows of more than one billion: Financial Select Sector SPDR ETF (XLF, -$2.0 billion) and Invesco S&P 500 Equal Weight ETF (RSP, -$1.0 billion).

Exchange-Traded Fixed Income Funds

Exchange-traded fixed income funds attracted $1.1 billion—the macro-group’s seventh straight week of positive flows and its largest this month. Fixed income ETFs have reported a weekly return of positive 0.22%, on average.

Government-mortgage ETFs (+$415 million) and flexible ETFs (+$377 million) had the largest weekly inflows under the fixed income ETF macro-group. While reporting a weekly return of positive 0.17%, government-mortgage ETFs took in their largest weekly inflow since the second week of this year. Flexible ETFs recorded their thirteenth consecutive week of net inflows.

The only three sub-groups to record weekly outflows were: international & global debt ETFs (-$131 million), government-Treasury & mortgage ETFs (-$99 million), and balanced ETFs (-$2 million). After thirteen straight weeks of inflows, international & global debt ETFs have recorded back-to-back weeks of outflows and negative weekly performance. The $131 million leaving the subgroup was their largest outflow since March.

iShares 7-10 Year Treasury Bond ETF (IEF, +$288 million) and SPDR Portfolio Mortgage Backed Bond ETF (SPMD, +$261 million) attracted the largest amounts of net new money under the macro-group. SPMD recorded its fourth-largest intake to date.

Conventional Equity Funds

Conventional equity funds (ex-ETFs) were net purchasers for the first week in 12, posting $12.8 billion in weekly inflows. As our disclaimer noted above, several American Funds paid out long-term capital gains and income distributions, going ex-dividend on last Wednesday, June 16th, which were reflected by a drop in their total net assets for the day. This led to temporary weekly outflows last week. The supermajority of those distributions was reinvested on June 17th, reversing the outflows, and as anticipated have been recorded as net inflows this week. All five of the top weekly conventional funds (ex-ETF) inflows this week were American Funds, each attracting well over $1 billion. Conventional equity funds posted a weekly return of positive 0.21% on average—their sixth straight week of positive performance.

Conventional domestic equity funds saw inflows this week for the first time in 26 weeks (+$11.0 billion). Many of the net inflows can be attributed to the American Funds referenced above. Non-domestic equities (ex-ETF) attracted an inflow of $1.8 billion—their largest inflow since March.

Conventional growth/value-large cap funds (+$11.8 billion), conventional international equity funds (+$999 million), and conventional global equity funds (+$799 million) were the top three sub-groups to see new money. Growth/value-small cap (-$598 million), growth/value-aggressive (-$279 million), and sector-other (-$71 million) conventional funds suffered the greatest weekly outflows.

Conventional Fixed Income Funds

Conventional fixed income funds took in weekly inflows of $1.6 billion—its fifth consecutive week of inflows with each of the last four being greater than $1.5 billion. The macro-group has only recorded two weeks of net outflows this calendar year.

Conventional fixed income funds were led by the flexible funds subgroup (+$1.3 billion), recognizing their tenth straight week of inflows. Government-Treasury funds followed with $386 million in weekly net inflows—their twelfth consecutive week of inflows.

Government-mortgage funds suffered the largest weekly outflows under the macro-group (-$258 million)—marking the subgroup’s seventh straight week of outflows despite a weekly performance of positive 0.19%.

Municipal bond funds (ex-ETFs) returned negative 0.26%, on average, over the fund-flows week and took in $1.5 billion—their twelfth week in a row of net inflows. The subgroup has reported positive performance for eight of the last 10 weeks. Municipal bond funds have only recorded two total weeks of net redemptions this year.

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