January 13, 2022

U.S. Weekly FundFlows Insight Report: Investors Turn Toward Financial/Banking Funds and ETFs for the Fund-Flows Week

by Tom Roseen.

Investors were overall net sellers of fund assets (including those of conventional funds and ETFs) for the first week in four, withdrawing a net $21.1 billion for Refinitiv Lipper’s fund-flows week ended January 12, 2022. However, the headline numbers are a bit misleading. Fund investors were net purchasers of equity funds (+$9.9 billion) and tax-exempt fixed income funds (+$231 million), while being net redeemers of money market funds (-$29.9 billion) and taxable bond funds (-$1.4 billion) for the week.

Market Wrap-Up

Market volatility was on a roll during the fund-flows week as investors considered the possible impacts that rising interest rates and monetary tightening might have on the economy after minutes from the December Federal Reserve Board’s Federal Open Market Committee (FOMC) meeting were released. The broad-based indices took a beating at the beginning of the flows week, with tech issues taking the brunt of the declines. Tech stocks, however, managed to claw their way back later in the week.

On the domestic side of the equation, the NASDAQ Composite Price Only Index (+0.58%) posted the strongest returns of the broadly followed U.S. indices for the fund-flows week as investors tested the waters of some of the deeply out-of-favor issues. It was followed by the S&P 500 Price Only Index (+0.55%). The Russell 2000 Price Only Index (-0.82%) experienced the largest declines for the week. Overseas, the FTSE 100 Price Only Index (+1.36%) chalked up the strongest performance of the often-followed broad-based international indices, while the Nikkei 225 Price Only Index (-1.13%) was the group straggler.

On Thursday, January 6, 2022, U.S. stocks finished the day lower after FOMC December meeting minutes showed Fed officials talked about a more aggressive wind down of its balance sheet and accelerated timetable for interest rate hikes, with St. Louis Fed President James Bullard saying the Fed could raise rates as early as March. The 10-year Treasury yield rose 21 basis points (bps) in the first four trading days of the year. In other news, first-time jobless claims rose slightly from the prior week to 207,000, but remained near a 52-week low, and the Institute for Supply Management said its December services index dropped to 62% from the record high of 69.1% the month before. Near-month crude oil prices witnessed a 2.1% gain, closing the day out at $79.46 per barrel (bbl).

All three major U.S. stock indices lost ground on Friday, January 7, with the NASDAQ experiencing its largest weekly decline since February 2021 after the Department of Labor reported a lower-than-expected nonfarm payrolls report. The U.S. economy added just 199,000 jobs in December, missing analyst expectations of 422,000. Nonetheless, the unemployment rate dropped to a pandemic low of 3.9% from 4.2% in November. Most pundits didn’t believe the report would derail the Fed’s plans to wind down its accommodative policies to combat inflation in 2022. The 10-year Treasury yield rose another three bps on the day, pressuring growth stocks and bolstering financial issues.

Despite Goldman Sachs, JPMorgan, and Deutsche Bank indicating that they expect four interest rate hikes in 2022, the NASDAQ was able to close out Monday, January 10, with slight gains, witnessing its biggest intraday turnaround since February 28, 2020. The Dow and S&P 500 suffered small declines as investors still fretted over proposed changes in the Federal Reserve policy. The 10-year Treasury yield rose two bps to settle at 1.78%, its highest closing value since January 17, 2020, while front-month oil futures declined 0.9% to settle at $78.23/bbl.

The S&P 500 snapped its five-day losing streak on Tuesday, January 11, after Federal Reserve Chair Jerome Powell painted a picture of a soft economic landing during his renomination hearing before the Senate Banking Committee as the Fed begins to remove its emergency stimulus measures and begins raising interest rates. During the testimony, Powell said:

“It really is time for us to move away from those emergency policy settings to a more normal level. It really should not have negative effects on the labor market.”

Despite investors expecting the central bank to move much more aggressively to fight inflation, the 10-year Treasury yield declined three bps on Tuesday, to settle at 1.75%, while near-month crude oil prices jumped 3.8% to close the day at $81.22/bbl.

The Dow and S&P closed up for the second straight day on Wednesday, January 12, with investors shrugging off news that the consumer-price index posted a 0.5% rise in December, as prices rose on a year-over-year basis at a near 40-year high of 7%. Slight gains in stocks were supported from economic news from the latest Federal Reserve Beige Book report, which showed growth in the ability of businesses to pass on price gains to customers in December. The 10-year yield slipped one bp, while crude oil futures rose 1.8% to $82.64/bbl.

Exchange-Traded Equity Funds

Equity ETFs witnessed their third consecutive week of net inflows—taking in $13.3 billion for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$10.6 billion), injecting money also for the third week in a row. However, for the fourth straight week, nondomestic equity ETFs witnessed net inflows, taking in $2.8 billion this past week. Sector financial/banking ETFs (+$2.4 billion) attracted the largest draw of net new money, followed by sector-other ETFs (+$2.2 billion) and international equity ETFs (+$2.1 billion). Meanwhile, small-cap ETFs (-$521 million) suffered the largest net redemptions of the equity ETF macro-groups for the flows week.

ProShares UltraPro QQQ ETF (TQQQ, +$2.2 billion) and Financial Select Sector SPDR ETF (XLF, +$1.4 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, iShares Core S&P 500 ETF (IVV, -$1.1 billion) experienced the largest individual net redemptions, and Invesco QQQ Trust 1 ETF (QQQ, -$1.0 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the first week in four, taxable fixed income ETFs witnessed net outflows, handing back $2.9 billion this last week. APs were net purchasers of corporate investment-grade debt ETFs (+$629 billion), while being net redeemers of corporate high-yield ETFs (-$2.1 billion), government-Treasury ETFs (-$663 million), and flexible ETFs (-$376 million). iShares 1-3 Year Treasury Bond ETF (SHY, +$317 million) and iShares Core Total USD Bond Market ETF (IUSB, +$223 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares iBoxx $ High Yield Corporate Bond ETF (HYG, -$1.8 billion) and iShares TIPS Bond ETF (TIP, -$631 million) handed back the largest individual net redemptions for the week.

For the seventh consecutive week, municipal bond ETFs witnessed net inflows, with investors injecting $351 million this week. iShares National Muni Bond ETF (MUB, +$149 million) and SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (HYMB, +$54 million) witnessed the largest draws of net new money of the municipal bond ETFs in the subgroup for the week.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net sellers of equity funds for the second week in a row—redeeming $3.4 billion—despite the macro-group recording a market gain of 0.64% for the fund-flows week. Domestic equity funds, suffering net redemptions of slightly less than $4.3 billion, witnessed their second consecutive week of net outflows while experiencing a 0.38% market gain on average for the fund-flows week. Nondomestic equity funds—posting a 1.23% weekly return on average—observed their fourth straight week of net inflows, taking in $858 million.

On the domestic equity side, fund investors were net redeemers of large-cap funds (-$2.4 billion) and small-cap funds (-$979 million). Investors on the nondomestic equity side were net purchasers of international equity funds (+$1.4 billion) but were net redeemers of global equity funds (-$517 million) for the week. Schwab S&P 500 Index Fund (SWPPX, +$333 million) and Principal Capital Appreciation Fund, Institutional Shares (PWCIX, +$273 million) attracted the largest amounts of net new money of all individual equity funds for the week.

Conventional Fixed Income Funds

For the third week in a row, taxable bond funds (ex-ETFs) witnessed net inflows—attracting $1.6 billion this past week—while posting a 0.02% gain on average for the fund-flows week. Investors were net purchasers of flexible funds (+$1.2 billion), corporate investment-grade debt funds (+$394 million), and government-Treasury funds (+$345 million) while being net redeemers of government-mortgage funds (-$297 billion) and government-Treasury & mortgage funds (-$137 million). Lord Abbett Floating Rate Fund, I Shares (LFRIX, +$358 million) and Oakmark Equity and Income Fund, R6 Shares (OAZBX, +$302 million) took in the largest amounts of net inflows of all individual taxable fixed income funds during the week.

The municipal bond funds group posted a 0.65% loss on average during the week and witnessed its first weekly net outflow in six, handing back $119 million this week. General & Insured Municipal Debt Funds (+$351 million) and Intermediate Municipal Debt Funds (+$243 million) experienced the largest net inflows of the group, while High Yield Municipal Debt Funds (-$387 million) and Short Municipal Debt Funds (-$333 million) suffered the largest net redemptions. Baird Core Intermediate Municipal Bond Fund, Institutional Shares (BMNIX, +$184 million) and Allspring Municipal Bond Fund, Institutional Shares (WMBIX, +$96 million) took in the largest draws of net new money of the individual tax-exempt fixed income funds for the week.

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