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May 4, 2023

U.S. Weekly FundFlows Insight Report: Despite Plus-Side Returns for the Week, ETF and Fund Investors Duck for Cover 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, injecting a net $5.8 billion for the Refinitiv Lipper fund-flows week ended Wednesday, May 3. However, fund investors were net purchasers of short-term assets, padding the coffers of money market funds (+$21.5 billion) while being net redeemers of equity funds (-$14.0 billion), taxable bond funds (-$930 million), and tax-exempt fixed income funds (-$846 million) for the week.

Market Wrap-Up

Despite growing concerns with U.S. regional banks, a debt ceiling debate standoff, another interest rate hike this week, and signs that the U.S. economy might be finally cooling down, a better-than-expected Q1 earnings season has kept investors in the market—at least from a performance point of view.

On the domestic equity side of the equation, investors became slightly more risk seeking for the week after several big tech stalwarts reported stronger-than-expected Q1 earnings, beating analyst expectations. The Nasdaq Composite (+1.44%) posted the strongest return of the broad-based U.S. indices, followed by the S&P 500 (+0.86%) and the Russell 2000 (+0.51%). The Dow Jones Industrial Average (+0.34%) was the relative laggard of the group. Overseas, the Shanghai Composite (+1.71%) posted the strongest plus-side returns of the often-followed broad-based international indices, followed by the Nikkei 225 (+1.25%) and the Xetra DAX Total Return Index (+0.21%). Meanwhile, the FTSE 100 (-0.31%) posted the only losses for the flows week.

For the fund-flows week, the Bloomberg U.S. Aggregate Bond Index (+0.56%) outpaced the Morningstar LSTA U.S. Leveraged Loan Index (+0.03%) and the Bloomberg Municipal Bond Index (-0.01%). The 10-year Treasury yield declined five basis points (bps) for the week, settling at 3.38%, while the two-year Treasury yield rose one bp to close out the flows week at 3.89%. The U.S. Treasury yield curve remained inverted, with the two- and 10-year Treasury yield spread (-51 bps) widening four bps for the week.

On Thursday, April 27, the S&P 500 and Dow booked their largest one-day gains since January after Microsoft (MSFT), Alphabet (GOOG), and Meta Platforms (META) Q1 earnings beat analyst expectations, offsetting economic data that showed signs of economic cooling. U.S. gross domestic product numbers showed the U.S. economy grew at a 1.1% rate in Q1, lower than analyst forecasts of 2.0%. However, possibly adding to the mixed inflationary signals, first-time jobless claims from the week prior showed a 16,000 decline in unemployment claims to 230,000, almost negating two weeks’ worth of rises.

The Dow rose 272 points on Friday, April 28, locking in its best monthly return since January even after investors learned about First Republic Bank’s inability to raise fresh capital after experiencing a significant rise in withdrawals. Stocks continued to build on the momentum seen in the previous session after some of the big tech names beat Wall Street’s earnings expectations.

U.S. stocks finished lower on Monday, May 1, as investors braced for another 25 bp interest rate increase by the Federal Reserve Board later in the week and learned that JPMorgan Chase agreed to buy the bulk of the failed First Republic Bank, splitting losses with the Federal Deposit Insurance Corp. In other news, the latest reading of the Institute for Supply Management’s April manufacturing index rose to 47.1% from the prior month’s 46.3%, but still signaling contraction.

The Dow finished 370 points lower on Tuesday, May 2, falling along with shares of regional bank stocks and energy sector issues, as jobs data pointed to a slowing economy. Continued concerns about regional U.S. banks, coupled with the Federal Reserve Board’s policy decisions due Wednesday and rising issues surrounding the deadlock in Congress over raising the U.S. debt ceiling pushed investors to the sidelines. March factory orders rose 0.9%, lifted by commercial airline orders, but once transportation orders were removed, factory orders declined 0.7%, falling for the second consecutive month.

On Wednesday, May 3, U.S. stock indices ended lower after the Fed raised interest rates by an expected 25 bps to a range of 5% to 5.25%, with many pundits believing this will be the last rate hike of this tightening campaign. However, in his news conference, Fed Chair Jerome Powell said, “A decision on a pause was not made today,” reiterating that getting inflation down to 2% “has a long way to go.” Investors’ fear of a nascent recession pushed oil prices sharply lower on the day, with U.S. crude oil benchmark prices closing below the $70 a barrel mark, their lowest since March.

Exchange-Traded Equity Funds

Equity ETFs experienced net outflows for the first week in four, handing back a little less than $7.8 billion for the most recent fund-flows week. Authorized participants (APs) were net sellers of domestic equity ETFs (-$7.1 billion), withdrawing money also for the first week in four, while nondomestic equity ETFs witnessed their first week of net outflows in five, handing back $714 million this past week. International equity ETFs (+$566 million) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by equity income ETFs (+$426 million) and sector-other ETFs (+$232 million). Meanwhile, large-cap ETFs (-$5.2 billion) suffered the largest net outflows, bettered by global equity ETFs (-$1.3 billion) and small-cap ETFs (-$984 million).

Invesco QQQ Trust 1 (QQQ, +$2.9 billion) and iShares Core S&P 500 ETF (IVV, +$983 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR S&P 500 ETF (SPY, -$8.0 billion) experienced the largest individual net redemptions and iShares MSCI ACWI ETF (ACWI, -$1.3 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the second consecutive week, taxable fixed income ETFs witnessed net outflows, although handing back just $648 million this week. APs were net purchasers of flexible ETFs (+$1.1 billion), government-Treasury ETFs (+$35 million), and balanced ETFs (+$32 million) while being net redeemers of corporate high-yield ETFs (-$1.3 billion) and corporate investment-grade debt ETFs (-$256 million).

iShares Core US Aggregate Bond ETF (AGG, +$676 million), SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, +$235 million), and iShares Core Total USD Bond Market ETF (IUSB, +$215 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, -$691 million) and SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB, -$614 million) handed back the largest individual net redemptions for the week.

For the third week in four, municipal bond ETFs experienced net outflows, handing back $82 million this week. iShares National Muni Bond ETF (MUB, +$36 million) witnessed the largest draw of net new money of the municipal bond ETFs, while SPDR Nuveen Bloomberg Municipal Bond ETF (TFI, -$68 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 sixty-fifth week in a row—redeeming $6.2 billion—with the macro-group posting a 0.72% market gain for the fund-flows week. Domestic equity funds—suffering net redemptions of slightly more than $5.3 billion—witnessed their eighteenth consecutive week of net outflows while posting a 0.79% market advance on average for the fund-flows week. Nondomestic equity funds—posting a 0.55% weekly market rise on average—observed their eleventh week of net outflows in a row, handing back slightly less than $854 million this week.

On the domestic equity side, fund investors were net redeemers of large-cap funds (-$2.7 billion) and mid-cap funds (-$768 million). Investors on the nondomestic equity side were net redeemers of global equity funds (-$542 million) and international equity funds (-$312 million) for the week.

Conventional Fixed Income Funds

For the eleventh week in a row, taxable bond funds (ex-ETFs) witnessed net outflows—handing back $253 million this past week—while posting a 0.47% market gain on average for the fund-flows week. The corporate investment-grade debt fund macro-group attracted the largest draw of net money for the week, taking in $577 million, followed by government-Treasury & mortgage funds (+$129 million) and flexible funds (+$91 million). Balanced funds (-$853 million) suffered the largest net redemptions, bettered by corporate high-yield funds (-$292 million) and government-mortgage funds (-$58 million).

The municipal bond funds group posted a 0.18% market gain on average during the fund-flows week (their second weekly market plus-side return in a row) and witnessed net outflows for the eleventh straight week, handing back $764 million this week. High Yield Municipal Debt Funds (-$337 million) suffered the largest net outflows of the macro-group, bettered by Short Municipal Debt Funds (-$117 million) and Intermediate Municipal Debt Funds (-$93 million), while General & Insured Municipal Debt Funds (+$3 million) witnessed the largest weekly net inflows of the macro-group.

Money Market Funds

Given the rise in regional bank concerns, it wasn’t too surprising to see money market funds (+$21.5 billion) witness their second consecutive weekly net inflows. U.S. Government Money Market Funds (+$8.2 billion) took in the largest draw of net new money for the week, followed by Money Market Instrument Funds (+$4.8 billion), U.S. Treasury Money Market Funds (+$3.5 billion), Institutional U.S. Treasury Money Market Funds (+$3.5 billion), and Institutional U.S. Government Money Market Funds (+$606 million), while Institutional Money Market Funds (-$1.4 billion) suffered the only net redemption.

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