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August 10, 2023

U.S. Weekly FundFlows Insight Report: Investors Go into Risk-Off Mode 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 four, injecting a net $10.8 billion for the LSEG Lipper fund-flows week ended Wednesday, August 9. Fund investors were net purchasers of money market funds (+$18.4 billion), taxable bond funds (+$785 million), and tax-exempt fixed income funds (+$278 million) while being net redeemers of equity funds (-$8.6 billion) for the week.

Market Wrap-Up

Investors took a risk-off approach to investing during the fund flows week as the Q2 earnings season approaches its final days and investors await July inflation reports at the end of the week.

On the domestic equity side of the equation, the Dow (+0.09%) posted the only plus-side return of the broad-based U.S. indices, followed by the Nasdaq Composite (-0.64%) and the S&P 500 (-1.01%). The Russell 2000 (-1.83%) was the laggard of the group. Overseas, the FTSE 100 (+0.70%) rose to the top of the leaderboard of the often-followed broad-based international indices, followed by the Shanghai Composite (-0.77%) and the Xetra DAX Total Return Index (-1.02%). Meanwhile, the Nikkei 225 (-1.76%) posted the largest decline for the flows week.

For the fund-flows week, the Bloomberg U.S. Aggregate Bond Index (+0.47%) outpaced the Morningstar LSTA U.S. Leveraged Loan Index (+0.13%) and the Bloomberg Municipal Bond Index (-0.17%). With fed-funds futures traders pricing in only a 14% chance that the Fed will hike its key lending rate at its September Federal Open Market Committee (FOMC) meeting—according to the CME FedWatch Tool, and the Treasury Department boosting the size of its quarterly sales of longer-term debt for the first time in more than two years, yields at the long end of the curve witnessed declines. The 10-year Treasury yield finished lower for the week, falling eight basis points (bps)—settling at 4.00%—while the one-month Treasury yield rose three bps to close out the flows week at 5.51%. The U.S. Treasury yield curve remained inverted, with the two- and 10-year Treasury yield spread (-79 bps) narrowing by one bp for the week. The four-month Treasury yield witnessed the largest decline in yields for the week, dropping 20 bps to 5.34%.

On Thursday, August 3, U.S. stocks fell for the third consecutive day as bond yields surged after the Bank of England hiked its key lending rate by 25 bps and investors continued to assess the news that Fitch Ratings downgraded U.S. credit earlier in the week. In other news, energy stocks got a shot in the arm after Saudi Arabia announced it would extend an oil production cut through September. The 10-year Treasury yield rose 12 bps on the day, closing at 4.20%.

U.S. stocks generally declined on Friday, August 4, after the U.S. Bureau of Labor and Statistics released a somewhat Goldilocks-style nonfarm payrolls reports for July. The U.S. economy added 187,000 jobs last month, missing analysts’ expectations of 200,000. However, the unemployment rate declined to 3.5% from the month before, with average hourly earnings rising a higher-than-expected 0.4% in July.  The 10-year Treasury yield witnessed its largest one-day decline since May 2, falling 15 bps on the day to 4.05%. In other news, Apple (AAPL) shares declined 4.8% after the firm reported its third straight quarter of declining sales and provided similar guidance for Q3.

The Dow experienced its best one-day performance in seven weeks on Monday, August 7, with investors jumping back into the fray after the S&P 500 posted its largest weekly decline since May during the prior week. Investors were keeping a keen eye on Treasury yields and corporate earnings as we enter the final stretch of the Q2 earnings season as they await inflation reports due out at the end of the week. The 10-year yield rose four bps for the day, closing at 4.09% after Federal Reserve Governor Michelle Bowman said over the weekend the central bank will likely need to raise interest rates higher to bring inflation down to the Fed’s target rate.

Stocks took a beating on Tuesday, August 8, after investors learned that China’s exports declined 14.5% from a year earlier and imports slid 12.4%, highlighting concerns of slowing global demand. Adding to the pall, Moody’s announced a possible downgrade of six major U.S. banks, raising fears about the general health of the finance sector after the sharp rise in interest rates over the last year. With investors becoming a bit more risk averse and looking for safe-haven opportunities, the 10-year Treasury yield declined seven bps to close the day at 4.02%.

On Wednesday, August 9, stocks took it on the collective chin again after front-month crude oil futures settled at a 2023 high of $84.40/barrel and ahead of the release CPI and PPI data over the following two days. Investors also reacted to the news of a 0.3% year-to-date decline in consumer prices in China, dovetailing on the fears of weak trade data released the day before and raising concerns of slowing growth in the world’s second largest economy.

Exchange-Traded Equity Funds

Equity ETFs witnessed net outflows for the first week in seven, handing back a little less than $3.1 billion for the most recent fund-flows week. Authorized participants (APs) were net sellers of domestic equity ETFs (-$3.0 billion), withdrawing money also for the first week in seven, while nondomestic equity ETFs witnessed net outflows for the second week running, but handing back just $44 million this past week. Small-cap ETFs (+$1.0 billion) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by sector-healthcare/biotechnology ETFs (+$565 million) and equity income ETFs (+$446 million). Meanwhile, large-cap ETFs (-$4.0 billion) suffered the largest net outflows, bettered by the commodities heavy, sector-other ETFs (-$835 million) and sector-financial/banking ETFs (-$830 million) macro-groups.

Health Care Select Sector SPDR Fund (XLV, +$634 million) and Invesco Buyback Achievers ETF (PKW, +$495 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, -$4.7 billion) experienced the largest individual net redemptions and Financial Select Sector SPDR Fund (XLF, -$533 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the fifth week in six, taxable fixed income ETFs experienced net inflows, taking in $741 million this week. APs were net purchasers of government-Treasury ETFs (+$1.7 billion), flexible ETFs (+$38 million), and government-Treasury & mortgage ETFs (+$18 million) while being net redeemers of corporate high-yield ETFs (-$614 million) and international & global debt ETFs (-$257 million).

iShares 0-3 Month Treasury Bond ETF (SGOV, +$542 million), iShares TIPS Bond ETF (TIP, +$490 million), and SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, +$371 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, -$838 million) and iShares 20+ Year Treasury Bond ETF (TLT, -$787 million) handed back the largest individual net redemptions for the week.

For the third week in four, municipal bond ETFs witnessed net inflows, taking in $281 million this week. iShares National Muni Bond ETF (MUB, +$180 million) witnessed the largest draw of net new money of the municipal bond ETFs, while VanEck High Yield Muni ETF (HYD, -$99 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 seventy-ninth week in a row—redeeming $5.6 billion—with the macro-group posting a 0.80% market decline for the fund-flows week. Domestic equity funds—suffering net redemptions of slightly more than $5.0 billion—witnessed their thirty-second consecutive week of net outflows while posting a 0.97% market loss on average for the fund-flows week. Nondomestic equity funds—posting a 0.25% weekly market decline on average—observed their twenty-fifth week of net outflows in a row, handing back slightly more than $527 million this week.

On the domestic equity side, fund investors were net redeemers of large-cap funds (-$3.3 billion) and equity income funds (-$521 million). Investors on the nondomestic equity side were net redeemers of international equity funds (-$281 billion) and global equity funds (-$246 million) for the week.

Conventional Fixed Income Funds

For the fifth week in six, taxable bond funds (ex-ETFs) witnessed net inflows—however, attracting just $44 million this past week—while posting a 0.18% market gain on average for the fund-flows week. The corporate investment-grade debt funds macro-group attracted the largest draw of net money for the week—taking in $219 million—followed by government-mortgage funds (+$56 million) and corporate high yield funds (+$55 million). Balanced funds (-$169 million) suffered the largest net redemptions, bettered by flexible funds (-$103 million) and international & global debt funds (-$25 million).

The municipal bond funds group posted a 0.10% market decline on average during the fund-flows week (their third weekly market decline in a row) and suffered net outflows for the second consecutive week, however, handing back just $3 million this week. High Yield Municipal Debt Funds (+$157 million) witnessed the largest net inflows of the macro-group, followed by General & Insured Municipal Debt Funds (+$70 million). Meanwhile, Short-Intermediate Municipal Debt Funds witnessed the largest net outflows, handing back $41 million.

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