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January 26, 2023

U.S. Weekly FundFlows Insight Report: Nondomestic Equity ETFs Attract Their Largest Draw of Net New Money on Record for the Fund Flows Week

by Tom Roseen.

Investors were net purchasers of fund assets (including those of conventional funds and ETFs) for the fifth week in a row, injecting a net $21.9 billion for the Refinitiv Lipper fund-flows week ended Wednesday, January 25. Fund investors were net purchasers of money market funds (+$15.4 billion) taxable bond funds (+$5.8 billion), and tax-exempt fixed income funds (+$1.3 billion), while being net redeemers of equity funds (-$555 million) for the week.

Market Wrap-Up

Despite mixed Q4 corporate earnings reports, soft economic reports, and a steadfast commitment by Federal Reserve officials to fight inflation ahead of their policy-setting meeting next week, U.S. equity markets posted relatively strong returns for the fund-flows week, while the fixed income indices witnessed some minor declines.

On the domestic side, after being beat up most of the flows week the Nasdaq Composite (+3.25%) posted the strongest plus-side returns of the broad-based U.S. indices, followed closely by the S&P 500 (+2.22%). The Dow Jones Industrial Average (+1.34%) was the relative laggard of the group. Overseas, the Nikkei 225 (+1.29%) posted the strongest returns of the often-followed broad-based international indices, while the FTSE 100 (-1.36%) and the Xetra DAX Total Return Index (-0.01%) were the group laggards.

For the fund-flows week, the Morningstar LSTA U.S. Leveraged Loan Index (+0.39%) outpaced the Bloomberg Municipal Bond Index (-0.04%) and the Bloomberg U.S. Aggregate Bond Index (-0.33%).

On Thursday, January 19, U.S. stocks ended lower as good economic news appeared to be bad news for stocks after first-time jobless claims for the week prior fell by an unexpected 15,000 to 190,000—showing the US labor market remains resilient despite a batch of recent layoffs in the technology sector. However, recessionary concerns were fanned after December retail sales showed a second consecutive month of contraction, dropping 1.1%, and December industrial production declined 0.7%—its largest monthly fall since September 2021. Ahead of the FOMC blackout period, several Fed officials reiterated the need to keep the interest rate policy more restrictive for some time. The 10-year Treasury yield rose two basis points (bps), closing out the day at 3.39%, while the one-month Treasury yield rose 10 bps to 4.69%.

The S&P 500 and Dow posted their best one-day returns in two weeks on Friday, January 20, helping erase some of the losses witnessed earlier in the week, after investors learned that Netflix reported it had gained 7.7 million new subscribers in the final quarter and pundits digested news of a string of recent layoffs by stalwart tech firms, like Alphabet, which announced its plans to cut 12,000 jobs globally. In other news, December U.S. existing home sales fell 1.5%, suffering its eleventh consecutive monthly decline. The 10-year Treasury yield rose nine bps to 3.48%.

U.S. stocks carried the updraft from the prior week to Monday, January 23, with the Nasdaq leading the rally as investors looked forward to the continuation of the Q4 corporate earnings season and prospects of a soft economic landing. According to Tajinder Dhillon, senior research analyst with Refinitiv, of the 57 constituents making up the S&P 500 that have reported Q4 earnings thus far, 63.2% beat analyst expectations (which is slightly lower than the long-term average of 66%). Investors pushed the 10-year Treasury yield up four bps to 4.52%.

The DJIA posted its third straight day of gains on Tuesday, January 24, rising more than 100 points on the day, while the S&P 500 and Nasdaq suffered minor declines as investors awaited earnings reports from tech giant Microsoft and Texas Instruments, slated to report at the end of the day. Disappointing guidance from the likes of 3M (MMM) and Johnson & Johnson (JNJ) reflected downbeat outlooks, casting a slight pall over the market. In other economic news, marginal improvements in the January flash S&P Global US manufacturing (46.7 from 46.2) and services (46.6 from 44.7) Purchasing Managers’ Indices weren’t enough to indicate the expansion of the U.S. economy—both continue to signal contraction. The 10-year Treasury yield fell six bps to 3.46%.

On Wednesday, January 25, the Dow just managed to remain on the plus-side, while Nasdaq Composite and S&P 500 suffered minor losses after disappointing earnings guidance from Microsoft, which stoked concerns of faltering corporate profits and a slowing economy. While Microsoft reported better-than-expected earnings, Amy Hood, the company’s chief financial officer, warned of softening demand for its cloud services as a result of the economic downturn.

Exchange-Traded Equity Funds

Equity ETFs experienced net inflows for the second week in three, attracting a little more than $2.8 billion for the most recent fund-flows week. Authorized participants (APs) were net redeemers of domestic equity ETFs (-$3.9 billion), withdrawing money for the third consecutive week, while nondomestic equity ETFs witnessed their fifth week of net inflows in a row, taking in $6.7 billion this past week—their largest weekly net inflows on record dating back to 1996 when Lipper began tracking weekly flows for nondomestic equity ETFs. International equity ETFs (+$6.6 billion) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by the large-cap ETFs (+$890 million) and sector-energy ETFs (+$186 million). Meanwhile, sector-health/biotechnology ETFs (-$1.3 billion) suffered the largest net outflows, bettered by sector-financial/banking ETFs (-$837 million).

JPMorgan BetaBuilders Europe ETF (BBEU, +$2.7 billion) and SPDR S&P 500 ETF (SPY, +$1.1 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, iShares Core Dividend Growth ETF (DGRO, -$1.242 billion) experienced the largest individual net redemptions and SPDR S&P Biotech ETF (XBI, -$1.163 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the fifth week running, taxable fixed income ETFs witnessed net inflows, taking in $5.0 billion this week. APs were net purchasers of government-Treasury ETFs (+$2.7 billion), corporate investment-grade debt ETFs (+$1.6 billion), and flexible ETFs (+$1.1 billion), while being net redeemers of corporate high-yield ETFs (-$1.2 billion).

Schwab Short Term US Treasury ETF (SCHO, +$2.3 billion), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, +$907 billion), and iShares US Treasury Bond ETF (GOVT, +$860 billion) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, -$678 million) and VanEck Fallen Angel High Yield Bond ETF (ANGL, -$416 million) handed back the largest individual net redemptions for the week.

For the first week in five, municipal bond ETFs experienced net outflows, handing back $611 million this week. Invesco National AMT-Free Muni Bond ETF (PZA, +$68 million) witnessed the largest draw of net new money of the municipal bond ETFs, while iShares National Municipal Bond ETF (MUB, -$508 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 fifty-first week in a row—redeeming $3.4 billion—despite the macro-group posting a 2.00% market gain for the fund-flows week. Domestic equity funds, suffering net redemptions of slightly less than $1.4 billion, witnessed their fourth consecutive week of net outflows while posting a 2.07% market rise on average for the fund-flows week. Nondomestic equity funds—posting a 1.84% weekly market return on average—observed their forty-third straight week of net outflows, handing back slightly less than $2.0 billion this week.

On the domestic equity side, fund investors, while injecting $687 million into small-cap funds, were net redeemers of large-cap funds (-$1.6 billion) and mid-cap funds (-$317 million). Investors on the nondomestic equity side were net redeemers of international equity funds (-$1.4 billion) and global equity funds (-$554 million) for the week.

Conventional Fixed Income Funds

For the third consecutive week, taxable bond funds (ex-ETFs) witnessed net inflows—taking in $736 million this past week—while posting a 0.19% market gain on average for the fund-flows week. The corporate investment-grade debt funds macro-group (+$1.7 billion) attracted the largest amount of net new money of the taxable bond funds group for the week, followed by flexible funds (+$313 million) and international & global debt funds (+$54 million). Balanced funds (-$538 million) suffered the largest net redemptions, bettered by government-Treasury funds (-$345 million).

The municipal bond funds group posted a 0.02% market loss on average during the fund-flows week (their first weekly market decline in four) but witnessed net inflows for the thrid week in a row, taking in $1.9 billion this week. High-Yield Municipal Debt Funds (+$858 million) attracted the largest net inflows of the macro-group, followed by General & Insured Municipal Debt Funds (+$753 million).

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