January 14, 2022

Fund and ETF Investors Embrace Value Plays in 2022

by Tom Roseen.

In the first couple of weeks of 2022, investors have punished the high-flying growth-oriented equity winners of 2021 and favored value-oriented issues and less interest-rate sensitive securities as the Federal Reserve Board messages its intent to reduce its balance sheet and begin hiking interest rates earlier than initially anticipated.

While the consumer-price index rose 0.5% in December to a near 40-year high of 7% on a year-over-year basis, investors breathed a sigh of relief that it wasn’t worse. That said, St. Louis Fed President James Bullard indicated that he felt that four interest rate hikes might be in the cards this year to address high inflation. The 10-year Treasury yield settled at 1.78% on January 10, 2022, its highest closing value since January 17, 2020. And while it has slipped from its recent high, it still closed at 1.70% on Thursday, January 13—an 18-basis point (bps) increase in the first nine trading days of the year.

Year to date, through the week ended January 13, 2022, value-oriented funds have returned 1.84%, while their growth- and core-oriented cohorts have suffered 7.35% and 1.87% declines, respectively. As one might expect, given the recent jump in the Treasury yield curve, Financial Services Funds (+5.07%) (including ETFs) have posted handsome returns.

Investors have also pushed up front-month crude oil futures prices in the first several trading days of the year to $82.12 per barrel, a 9.19% rise year to date (YTD). As a result, Natural Resources Funds (+11.30%), Energy MLP Funds (+7.45%), and Global Natural Resources Funds (+6.73%) have experienced strong returns so far this year. As one might expect, Commodities Energy Funds (+6.37%) benefitted as well.

With the yield curve generally shifting up, it’s not too surprising to see the average taxable fixed income fund suffer a month-to-date decline of 0.69%, with General U.S. Treasury Funds (-1.86%) witnessing the largest losses, followed by Emerging Markets Hard Currency Debt Funds (-1.70%) and a bit surprisingly, Inflation Protected Bond Funds (-1.52%). Loan Participation Funds (+0.36) was one of three taxable fixed income classifications to post plus-side returns month to date.

And despite these dismal returns, fund and ETF investors have injected $19.1 billion into equity funds (-$6.8 billion) and ETFs (+25.9 billion) so far this year, while padding the coffers of taxable bond funds to the tune of $4.0 billion, with conventional taxable bond funds attracting some $6.2 billion, while taxable bond ETFs have experienced net redemptions of $2.2 billion.

On the domestic equity side, growth-oriented funds handed back $9.9 billion, with Large-Cap Growth Funds (-$4.9 billion, including ETFs) suffering the largest net redemptions, while value-oriented funds took in some $3.9 billion month to date so far, with Multi-Cap Value Funds (+$2.9 billion) attracting the largest draw of net money. However, S&P 500 Index Funds (+$2.9 billion) and Equity Leverage Funds (+$2.4 billion) took in the second and third largest draws of net new money month to date of the U.S. Diversified Equity Funds macro-group. Nonetheless, month to date Financial Services Funds (+$3.6 billion) attracted the largest net inflows of all equity classifications so far this year.

World equity funds took in $7.3 billion month to date, with international equity funds (+$6.4 billion) attracting the lion’s share of new money, while their global equity funds counterparts attracted $942 million.

On the taxable fixed income side, Loan Participation Funds (+$2.7 billion, including ETFs) attracted the largest month-to-date estimated net flows, followed by Core Bonds Funds (+$1.8 billion) and Inflation Protected Bond Funds (+$1.6 billion), while General U.S. Treasury Funds (-$2.4 billion) have suffered the largest net redemptions so far this year, bettered slightly by High Yield Funds (-$1.6 billion).

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