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March 9, 2023

U.S. Weekly FundFlows Insight Report: Investors Embrace Both Fixed Income and Equity ETFs While Turning a Cold Shoulder to Conventional Funds During the Fund-Flows Week

by Tom Roseen.

Investors were net purchasers of fund assets (including those of conventional funds and ETFs) for the second week in a row, but they injected only a net $853 million for the Refinitiv Lipper fund-flows week ended Wednesday, March 8. Fund investors were net purchasers of taxable bond funds (+$3.9 billion) while being net redeemers of money market funds (-$2.0 billion), equity funds (-$735 million), and tax-exempt fixed income funds (-$308 million) for the week.

Market Wrap-Up

Despite sticky inflation data, hawkish comments by Federal Reserve Chair Jerome Powell during his testimony before Congress, and subsequent rise in interest rates, stocks and fixed income securities weathered the storm during the fund-flows week, at least initially.

On the domestic side, as investors appeared to ignore rising Treasury yields, stocks generally managed to remain on the plus-side for the fund-flows week. The Nasdaq Composite (+1.73%) witnessed the strongest positive returns of the broad-based U.S. indices, followed by the S&P 500 (+1.03%) and the Dow Jones Industrial Average (+0.42%). The Russell 2000 (-1.00%) witnessed the only declines of the group. Overseas, the Nikkei 225 Index (+2.78%) posted the strongest returns of the often-followed broad-based international indices, followed by the Xetra DAX Total Return Index (+0.99%). Meanwhile, the Shanghai Composite (-2.07%) and the FTSE 100 (-1.22%) were the group laggards.

For the fund-flows week, the Morningstar LSTA U.S. Leveraged Loan Index (+0.29%) outpaced the Bloomberg Municipal Bond Index (+0.16%) and the Bloomberg U.S. Aggregate Bond Index (+0.07%).

On Thursday, March 2, all three major U.S. stock indices posted their best one-day return in two weeks, despite the 10-year Treasury yield rising above 4.00% the day before—for the first time since November 9, 2022—as investors anticipated a rise in the Fed’s key lending rate at its next meeting later in the month. Equity investors appeared to be cheering better-than-expected earnings reports by select Dow components while ignoring the news that first-time jobless claims fell to 190,000 last week from 192,000 for the prior week. While Atlanta Fed President Raphael Bostic said he strongly supports a 25-basis point (bp) hike in the Fed’s key lending rate at its next policy-setting meeting, Fed-funds futures traders priced in the possibility of a 50-bps hike in March. The 10-year Treasury yield rose seven bps, closing out the day at 4.08%, while the two-year Treasury yield remained unchanged at 4.89%.

U.S. stocks ended strongly higher on Friday, March 3, with the S&P 500 and the Dow snapping a three- and four-week losing streak, respectively, after the Institute of Supply Management reported its February services index remained unchanged at 55.1, indicating the U.S. economy is still expanding despite inflationary headwinds and the increasing probability that the Fed’s monetary policy may need to become tighter and for a longer period than previously anticipated in its battle against inflation. The 10-year Treasury yield declined 11 bps to 3.97%.

U.S. markets eked out modest gains on Monday, March 6, ahead of Fed Chair Jerome Powell’s semi-annual Congressional testimony slated for Tuesday and Wednesday and the February nonfarm payrolls report due out on Friday. U.S. January factory orders declined 1.6%, less than the 1.8% decline forecasted by analysts. The two- and 10-year Treasury yields rose three and two bps, respectively, to close at 4.89% and 3.98%

The Dow and S&P 500 posted their worst one-day declines in two weeks on Tuesday, March 7, after investors dissected Powell’s hawkish remarks to Congress, which indicated the central bank will not rule out larger interest rate hikes at its March 21-22 meeting to combat sticky inflation. Powell said, “The latest economic data have come in stronger than expected, which suggest that the ultimate level of interest rates is likely to be higher than previously anticipated.” According to the CME FedWatch tool, Fed-funds futures traders priced in a 70% probability that the Fed will raise rates by 50 bps on March 22, as compared to a 30% chance the day before. The two-year Treasury yield rose 11 bps to 5.00%—its highest closing value since June 18, 2007. The two- and 10-year Treasury yield spread widened to a negative 103 bps, the deepest inversion since October 2, 1981 (according to Dow Jones Market Data)—and to some, a possible sign of a recession ahead.

On Wednesday, March 8, stocks ended mixed as investors contemplated higher-than-previously-expected interest rates as they awaited February’s nonfarm payrolls on Friday. In Powell’s testimony to the House Financial Services Committee on Wednesday, he indicated the central bank was prepared to increase the pace of interest rate hikes if the data warranted it to help combat inflation. While data released by the Department of Labor showed a decline in job openings in January to 10.8 million from December’s 11.2 million, the number was still significant, suggesting the labor market remains strong. According to ADP, U.S. private payrolls for February rose by 242,000, up from 119,000 reported last month. The two- and 10-year Treasury yields rose five and one bps, respectively, to 5.05% and 3.98%.

Exchange-Traded Equity Funds

Equity ETFs experienced net inflows for the first week in three, taking in a little less than $3.2 billion for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$3.2 billion), injecting money for the first week in four, while nondomestic equity ETFs witnessed their first week of net outflows in 11, but they handed back just $5 million this past week. Large-cap ETFs (+$1.3 billion) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by small-cap ETFs (+$1.0 billion) and international equity ETFs (+$590 million) macro-groups. Meanwhile, global ETFs (-$595 million) suffered the largest net outflows, bettered by sector-healthcare/biotechnology ETFs (-$559 million).

Invesco QQQ Trust 1 (QQQ, +$1.1 billion) and iShares Core S&P Mid-Cap ETF (IJH, +$555 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, iShares MSCI ACWI ETF (ACWI, -$569 million) experienced the largest individual net redemptions and Health Care Select Sector SPDR ETF (XLV, -$556 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the third consecutive week, taxable fixed income ETFs witnessed net inflows, taking in $4.9 billion this week. APs were net purchasers of government-Treasury ETFs (+$3.3 billion), corporate investment-grade debt ETFs (+$944 billion), and international & global debt ETFs (+$175 million), while being net redeemers of government-Treasury & mortgage ETFs (-$12 million).

SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, +$723 million), iShares 20+ Year Treasury Bond ETF (TLT, +$509 million), and iShares 7-10 Year Treasury Bond ETF (IEF, +$494 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, Schwab Intermediate-Term US Treasury ETF (SCHR, -$469 million) and SPDR Bloomberg High Yield Bond ETF (JNK, -$254 million) handed back the largest individual net redemptions for the week.

For the first week in seven, municipal bond ETFs experienced net inflows, attracting $50 million this week. iShares National Muni Bond ETF (MUB, +$105 million) witnessed the largest draw of net new money of the municipal bond ETFs, while iShares Short-Term National Muni Bond ETF (SUB, -$83 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-seventh week in a row—redeeming $3.9 billion—with the macro-group posting a 0.42% market return for the fund-flows week. Domestic equity funds, suffering net redemptions of slightly more than $3.8 billion, witnessed their tenth consecutive week of net outflows while posting a 0.54% market gain on average for the fund-flows week. Nondomestic equity funds—posting a 0.15% weekly return on average—observed their third week of net outflows in a row, handing back slightly less than $73 million this week.

On the domestic equity side, fund investors—while injecting $52 million into small-cap funds—were net redeemers of large-cap funds (-$2.9 billion) and mid-cap funds (-$366 million). Investors on the nondomestic equity side were net purchasers of international equity funds (+$371 million) while being net redeemers of global equity funds (-$444 million) for the week.

Conventional Fixed Income Funds

For the third week in a row, taxable bond funds (ex-ETFs) witnessed net outflows—handing back $1.0 billion this past week—while posting a 0.03% market gain on average for the fund-flows week. The government-mortgage funds macro-group (+$214 million) attracted the largest amount of net new money of the taxable bond funds group for the week, followed by government-Treasury & mortgage funds (+$131 million) and corporate high-quality funds (+$12 million). Balanced funds (-$410 million) suffered the largest net redemptions, bettered by flexible funds (-$294 million).

The municipal bond funds group posted a 0.11% market gain on average during the fund-flows week (their second weekly market rise in a row) and witnessed net outflows for the third straight week, handing back $358 million this week. Short Municipal Debt Funds (-$181 million) suffered the largest net outflows of the macro-group, bettered by Intermediate Municipal Debt Funds (-$132 million), while General & Insured Municipal Debt Funds (+$130 million) witnessed the largest weekly net inflows of the macro-group.

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