October 1, 2021

Market Participants Retreat from Large-Cap Funds in September

by Jack Fischer.

Two weeks ago, we looked at the September Effect and its impact on estimated net flows into and out of funds and ETFs. With the month now concluded, we can add yet another instance of dreadful September performance to the list of years touched by the September Effect.

The September Effect is a market anomaly where major indices (both U.S. and ex-U.S.) underperform during September as compared to the rest of the months within that same year. The anomaly is thought to be unrelated to any individual market impact, event, or news. Participants have a range of theories that are not limited to: investors choosing to realize gains as the summer comes to an end, funds choosing to take advantage of tax-loss harvesting as the end of the year approaches, as well as the September Effect even becoming a self-fulfilling prophecy.

Coincidence or not, September 2021 brought together the perfect storm of economic stressors that have been lingering since the start of the pandemic. Persistent inflation, slowing economic growth, interest rate increases, and supply chain constraints met with Federal Reserve personnel changes and a near U.S. government shutdown. This culmination of worrisome macro events led to the S&P 500 (-4.8%) logging its worst monthly performance since March 2020. Both the NASDAQ (-5.4%) and DJIA (-4.3%) struggled as well.

Macro-group wise, equity funds realized their first monthly net outflow in seven months (preliminary -$9.0 billion). Investors retreated to money market funds (preliminary +31.8 billion) and taxable fixed income funds (preliminary +$20.1 billion) in September.

Drilling into the exodus from equities, large-cap funds have suffered the most. The increasingly hawkish sentiment being conveyed through the Fed, rising Treasury yields, and a possible easing on asset purchases coming this year have shifted market participants’ favor towards small-cap ETFs.

Not only have Treasury yields risen and fallen dramatically throughout the past year, but the speed at which they are doing so is unprecedented. The periods this year where the 10-year yield has been rising have manifested in small-cap fund inflows while wounding the pricier larger-cap funds. Once the 10-year started to fall back in June, we saw a reversal back into large-caps and away from small-caps.

Rates and Fed policy have not only shifted investor funds from large to small but also shifted capital from growth funds to value. Rising rates hurt technology issues while supporting financials. Lipper Large-Cap Growth ETFs have witnessed $2.1 billion in net outflows so far in September, marking the largest outflow from an equity ETF Lipper classification over the month.


Just this past week the iShares: Russell 2000 ETF (IWM) took in $2.4 billion while iShares: Core S&P 500 (IVV) posted $5.8 billion in outflows. More weekly flow trends here.

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