January 12, 2023

U.S. Weekly FundFlows Insight Report: ETF and Mutual Fund Investors Pad the Coffers of Taxable and Tax-Exempt Bond Funds for the Fund Flows Week

by Tom Roseen.

Investors were net purchasers of fund assets (including those of conventional funds and ETFs) for the third week in a row, injecting a net $2.3 billion for the Refinitiv Lipper fund-flows week ended Wednesday, January 11. Fund investors were net purchasers of taxable bond funds (+$11.0 billion—their largest weekly net inflows since February 3, 2021) and tax-exempt fixed income funds (+$2.0 billion, their largest since July 14, 2021), while being net redeemers of money market funds (-$9.4 billion) and equity funds (-$1.2 billion) for the week.

Market Wrap-Up

The Nasdaq booked its longest winning streak (five days) in almost four months during the fund-flows week as markets built on a positive start to 2023, but ahead of the release of inflation data due at week’s end and the start to the Q4 corporate earnings. Nonetheless, despite the continued hawkish stance by Federal Reserve officials, concerns of a slowing economy, and a bit of handwringing over corporate profitability, markets rallied during the week.

On the domestic side, the Nasdaq Composite (+4.52%—its second consecutive week of positive returns) posted the strongest plus-side returns of the broad-based U.S. indices for the fund-flows week, followed closely by the Russell 2000 (+4.03%). The Dow Jones Industrial Average (+2.11%) was the relative laggard of the group. Overseas, the Xetra DAX Total Return Index (+4.61%) posted the strongest returns of the often-followed broad-based international indices, while the Nikkei 225 (+2.40%) and the FTSE 100 (+2.54%) were the group relative laggards.

For the fund-flows week, the Bloomberg U.S. Aggregate Bond Index (+1.46%) outpaced the Bloomberg Municipal Bond Index (+1.31%) and the Morningstar LSTA U.S. Leveraged Loan Index (+1.24%).

On Thursday, January 5, U.S. stocks ended lower after December ADP private payrolls (+235,000 jobs) data surprised to the upside, beating analyst expectations of 153,000, and hawkish comments by Fed officials weighed on investors’ collective psyche. Adding to the good news is bad new dynamic pressuring markets, first-time jobless claims for the week prior fell to 204,000, its lowest level since September and job openings data of more than 10 million openings helped confirm the U.S. labor market is still firing on all cylinders. Hawkish comments during the day by Fed officials impacted the markets as well, with Kansas City Federal Reserve Bank President Esther George stating she raised her fed-funds rate forecast to more than 5% and other Fed officials clearly stated there is still much work to do to tame inflation. The 10-year Treasury yield declined two basis points (bps), closing out the day at 3.71%, while the one-month Treasury yield rose 10 bps to 4.30%.

The S&P 500 snapped a four-week losing streak on Friday, January 6, rising 700 points on the day after the U.S. Department of Labor released a better-than-expected nonfarm payrolls report but showed wage growth cooled in December. The U.S. economy added 223,000 new jobs in December, beating expectations of 200,000, with the unemployment rate declining to and matching a 55-year low of 3.5%. The Bureau of Labor Statistics reported that December wage growth grew by 0.3%, slightly less than the 0.4% growth seen in November. In other news, the Institute for Supply Management reported its service sector index showed signs of contraction, falling to 49.6% in December. While the one-month Treasury yield rose two bps on the day to 4.32%, the 10-year Treasury yield declined 16 bps to 3.53%.

Stocks ended mostly lower on Monday, January 9, after Fed officials said they expected rates to rise above 5%. Stocks fell off from early highs after San Franciso Fed President Mary Daly said, “I think something above five is absolutely, in my judgement, going to be likely.” However, helping support improving market sentiment, Asian equities were up as investors embraced China’s reopening after it relaxed its strict COVID-19 policy. Investors pushed the one-month Treasury yield up five bps to 4.37%.

The DJIA rallied on Tuesday, January 10, rising almost 200 points on the day as investors awaited the beginning of the Q4 earnings at the end of the week and an inflation update on Thursday. On the economic front, wholesale inventory numbers showed inventories climbing 1% in November ahead of the holidays, while as reported a few weeks ago, sales fell by 0.6%. The 10-year Treasury yield rose eight bps to 3.61%.

On Wednesday, January 11, the Nasdaq Composite booked its longest winning streak in four months as investors awaited more evidence on Thursday that inflation continued to slip, with some pundits still hoping the Fed will pivot to a more dovish stance soon—despite Fed officials’ resolute hawkish comments to the contrary. The 10-year Treasury yield finished the day down seven bps at 3.54% as investors contemplate how long higher interest rates and slowing economic growth will linger in 2023.

Exchange-Traded Equity Funds

Equity ETFs experienced net inflows for the second week in three, attracting a little less than $2.0 billion for the most recent fund-flows week. Authorized participants (APs) were net redeemers of domestic equity ETFs (-$1.3 billion), withdrawing money for the second consecutive week, while nondomestic equity ETFs witnessed their third week of net inflows in a row, taking in $3.3 billion this past week—their largest weekly net inflows since the week ended April 6, 2022. International equity ETFs (+$3.2 billion) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by the commodities heavy, sector-other ETFs (+$2.3 billion) and equity income ETFs (+$1.3 billion). Meanwhile, large-cap ETFs (-$3.7 billion) suffered the largest net outflows, bettered by small-cap ETFs (-$934 million).

Industrial Select Sector SPDR ETF (XLI, +$1.1 billion) and iShares Core MSCI Emerging Markets ETF (IEMG, +$929 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, Invesco QQQ Trust 1 (QQQ, -$1.8 billion) experienced the largest individual net redemptions and iShares Russell 1000 Growth ETF (IWF, -$908 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the third week running, taxable fixed income ETFs witnessed net inflows, taking in $9.8 billion this week—their largest weekly net inflows on record dating back to 2002 when Lipper began tracking weekly flows for this ETF macro-group. APs were net purchasers of corporate investment-grade debt ETFs (+$5.6 billion), corporate high-yield ETFs (+$2.4 billion), and flexible ETFs (+$884 million), while being net redeemers of government-mortgage ETFs (-$23 million).

iShares iBoxx $ High Yield Corporate Bond ETF (HYG, +$1.6 billion), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, +$1.5 billion), and iShares Core US Aggregate Bond ETF (AGG, +$1.4 billion) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares 0-3 Month Treasury Bond ETF (SGOV, -$862 million) and Goldman Sachs Access Treasury 0-1 Year ETF (GBIL, -$357 million) handed back the largest individual net redemptions for the week.

For the third week in a row, municipal bond ETFs experienced net inflows, taking in $454 million this week. iShares National Muni Bond ETF (MUB, +$342 million) witnessed the largest draw of net new money of the municipal bond ETFs, while SPDR Nuveen Bloomberg Municipal Bond ETF (TFI, -$116 million) experienced the largest net redemptions in the subgroup.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net sellers of equity funds for the forty-ninth week in a row—redeeming $3.2 billion—despite the macro-group posting a 3.18% market gain for the fund-flows week. Domestic equity funds, suffering net redemptions of slightly more than $1.8 billion, witnessed their second consecutive week of net outflows while posting a 3.10% market rise on average for the fund-flows week. Nondomestic equity funds—posting a 3.36% weekly market return on average—observed their forty-first straight week of net outflows, handing back slightly less than $1.3 billion this week.

On the domestic equity side, fund investors were net redeemers of large-cap funds (-$1.2 billion) and mid-cap funds (-$206 million). Investors on the nondomestic equity side were net redeemers of international equity funds (-$922 million) and global equity funds (-$402 million) for the week.

Conventional Fixed Income Funds

For the first week in 21, taxable bond funds (ex-ETFs) witnessed net inflows—taking in $1.2 billion this past week—while posting a 1.50% market gain on average for the fund-flows week. The corporate investment-grade debt funds macro-group (+$934 million) attracted the largest amount of net new money of the taxable bond funds group for the week, followed by flexible funds (+$211 million) and corporate high-yield funds (+$157 million). Balanced funds (-$377 million) suffered the largest net redemptions, bettered by government-Treasury funds (-$25 million).

The municipal bond funds group posted a 1.12% market gain on average during the fund-flows week (their second consecutive weekly plus-side market return) and witnessed net inflows also for the first week in 21, taking in $1.5 billion this week. While High-Yield Municipal Debt Funds (+$975 million, its fifth largest weekly net inflow on record, dating back 1992 when Lipper began tracking weekly flows) attracted the largest net inflows of the macro-group, followed by General & Insured Municipal Debt Funds (+$637 million), Short Municipal Debt Funds (-$318 million) suffered the largest net redemptions.

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