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November 9, 2023

U.S. Weekly FundFlows Insight Report: Investors Give a Cold Shoulder to Conventional Funds During the Fund-Flows Week but Embrace Equity and Bond ETFs

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 $14.2 billion for the LSEG Lipper fund-flows week ended Wednesday, November 8.

Fund investors were net purchasers of fixed income funds (+$7.1 billion), money market funds (+$3.9 billion), equity funds (+$3.0 billion), commodity funds (+$453 million), and alternatives funds (+$262 million) while being net redeemers of mixed-assets funds (-$573 million) for the week.

The data sourced in this article were derived from the LSEG Lipper Global Fund Flows application, which differ from Lipper U.S. Fund Flow data because of a change in methodology. This new application can be found on LSEG Workspace.

Market Wrap-Up

A weaker-than-expected October jobs report, a drop in oil prices and inflation expectations, and rising hopes that the Fed is done hiking interest rates pushed equities to their longest daily winning streak in two years and the 10-year Treasury yield dropped to its lowest level since September.

On the domestic equity side of the equation, the Nasdaq Composite (+4.51%) posted the strongest returns of the often-followed broad-based U.S. indices, followed by the S&P 500 (+3.42%) and the Russell 2000 (+2.66%). The Dow Jones Industrial Average (+2.52%) was the relative laggard of the group. Overseas, the DAX Total Return Index (+3.69%) rose to the top of the leaderboard of the often-followed broad-based international indices, followed by the FTSE 100 (+2.17%) and the Nikkei 225 (+1.87%). Meanwhile, the Shanghai Composite (+1.57%) posted the weakest returns of the subgroup for the flows week.

The Bloomberg Municipal Bond Index (+2.55%) outperformed the Bloomberg U.S. Aggregate Bond Index (+1.69%) and the Morningstar LSTA U.S. Leveraged Loan Index (+0.56%) for the fund-flows week. For the week, the Treasury yield curve shifted down, with the 10-year Treasury yield plummeting 28 basis points (bps)—settling at 4.49%—while the two-month Treasury yield witnessed the smallest decline, falling just one bp to 5.54%. The U.S. Treasury yield curve remained inverted, with the two- and 10-year Treasury yield spread (-44 bps) widening by 26 bps during the week.

On Thursday, November 2, U.S. stocks finished higher on rising hopes that the Federal Reserve Board might be done hiking interest rates after it held its key lending rate steady on Wednesday. The S&P 500 posted its strongest one-day percentage gain since April 27, rising 1.89%, after Fed officials suggested that rising bond yields have helped in the job of fighting inflation. Supporting that message, new weekly jobless claims for the week prior rose by 5,000 to 217,000—a seven-week high—coming in higher than analysts’ expectations. The Bank of England followed the Fed’s lead, keeping rates steady for the second consecutive month. The 10-year Treasury yield fell 10 bps to 4.67% on the day.

U.S. stocks continued their ascent on Friday, November 3, after the Bureau of Labor Statistics reported the U.S. added 150,000 jobs in October, missing analysts’ expectations of 170,000, fueling optimism that the Fed may be done with its rate hiking campaign as the labor market shows signs of cooling. The unemployment rate showed little change at 3.9%. The Institute for Supply Management reported the October Services Purchasing Manager Index—while still showing expansion—fell 1.8 bps to 51.8% from September’s reading of 53.6%. This might suggest the economy is softening. The 10-year Treasury yield fell another 10 bps to 4.57%.

The Dow locked in its longest winning streak since late July, rising for the sixth consecutive trading session, on Monday, November 6, as stocks road the tailwinds from last week’s nonfarm payrolls report and the Fed’s FOMC meeting. According to our proprietary research team colleagues, using LSEG I/B/E/S data, of the 403 companies in the S&P 500 that have reported Q3 earnings through November 3, 81.6% beat analyst expectations. This compares to the long-term average of 66%. The 10-year Treasury yield rose 10 bps to 4.67% as investors await a series of bond auctions later in the week.

The Nasdaq and S&P 500 notched their longest winning streaks since November 8, 2021, on Tuesday, November 7, as oil prices declined, and investors reacted to Fed official comments. Front-month crude oil futures fell 4.3% on the day to close at $77.37/bbl. as investors reacted to lower-than-expected China trade data, raising demand concerns. In a television interview, Chicago Federal Reserve President Austan Goolsbee said a slowdown in October job creation was welcome news because it brought the labor market into “a more balanced” and sustainable growth. The 10-year Treasury yield declined nine bps to 4.58%.

While the Dow witnessed a minor decline on Wednesday, November 7, the S&P 500 and the Nasdaq extended their winning streaks as investors awaited to hear from Fed Chair Jerome Powell on Thursday and watched the Treasury Department’s auction of 10-year notes, which was met with average demand. The 10-year Treasury yield declined nine bps to close out the fund-flows week at 4.49%—its lowest closing value since September 22.

Exchange-Traded Equity Funds

Equity ETFs witnessed net inflows for the sixth consecutive week, attracting a little more than $8.8 billion for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$8.1 billion), injecting money also for the sixth week in a row, while nondomestic equity ETFs witnessed net inflows for the first week in three, attracting $680 million this past week.

Large-cap ETFs (+$2.5 billion) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by small-cap ETFs (+$2.4 billion) and domestic sector equity ETFs (+$1.6 billion). Meanwhile, developed global markets ETFs (-$48 million) suffered the only net outflows, bettered by the emerging markets ETFs (+$61 million) and mid-cap ETFs (+$119 million) macro-groups.

Exchange-Traded Alternatives, Commodities, and Mixed-Assets Funds

Alternatives ETFs (+$620 million) witnessed the largest net inflows of the other equity-based macro-classifications, followed by the commodity ETFs (+$478 million) and mixed-assets ETFs (-$37 million) macro-classifications for the week.

iShares Russell 2000 ETF (IWM, +$1.1 billion) and iShares Core S&P 500 ETF (IVVF, +$1.1 billion) attracted the largest amounts of net new money of all individual equity and equity-based ETFs. At the other end of the spectrum, SPDR S&P 500 ETF Trust (SPY, -$1.4 billion) experienced the largest individual net redemptions and Invesco QQQ Trust Series 1 (QQQ, -$1.1 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the fifth consecutive week, taxable fixed income ETFs experienced net inflows, taking in $8.8 billion this week. APs were net purchasers of high-yield ETFs (+$4.9 billion), general domestic taxable fixed income ETFs (+$3.3 billion), and short/intermediate investment-grade ETFs (+$753 million) while being net redeemers of short/intermediate government & Treasury ETFs (-$1.3 billion) and world income ETFs (-$11 million).

iShares iBoxx $ High Yield Corporate Bond ETF (HYG, +$3.3 billion), iShares iBoxx $ Inv Grade Corporate Bond ETF (LQD +$1.6 billion), and iShares Core US Aggregate Bond ETF (AGG, +$902 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares Short Treasury Bond ETF (SHV, -$1.2 billion) and SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, -$998 million) handed back the largest individual net redemptions for the week.

For the ninth consecutive week, municipal bond ETFs witnessed net inflows, taking in $1.0 billion this week. iShares National Muni Bond ETF (MUB, +$195 million) witnessed the largest draw of net new money of the municipal bond ETFs, while Invesco California AMT-Free Municipal Bond ETF (PWZ, -$65 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 ninety-second week in a row—redeeming $5.8 billion—with the macro-group posting a 2.88% market return for the fund-flows week. Domestic equity funds—suffering net redemptions of slightly more than $4.0 billion—also witnessed their ninety-second consecutive week of net outflows while posting a 3.13% market rise on average for the fund-flows week. Nondomestic equity funds—posting a 2.44% weekly market gain on average—observed their thirty-fifth week of net outflows in a row, handing back slightly less than $1.5 billion this week.

On the domestic equity side, fund investors were net redeemers of large-cap funds (-$1.1 billion), multi-cap funds (-$780 million), and equity income funds (-$687 million). Investors on the nondomestic equity side were net sellers of developed international markets funds (-$1.3 billion) and emerging markets equity funds (-$318 million) for the week.

Conventional Alternatives, Commodities, and Mixed-Assets Funds

Commodities funds (-$25 million) witnessed the smallest net outflows of the other equity-based macro-classifications, followed by the alternative equity funds (-$358 million) and mixed-assets funds (-$536 million) macro-classifications for the week.

Conventional Fixed Income Funds

For the ninth consecutive week, taxable bond funds (ex-ETFs) witnessed net outflows, handing back $1.6 billion this past week—while posting a 1.28% market return on average for the fund-flows week. The high-yield funds macro-group witnessed the largest net inflows for the week—taking in $1.3 billion, followed by alternative bond funds (+$236 million) and general domestic taxable fixed income funds (-$23 million). Short/intermediate investment-grade debt funds (-$2.2 billion) suffered the largest net redemptions, bettered by government & Treasury fixed income funds (-$394 million) and world income funds (-$285 million).

The municipal bond funds group posted a 2.23% market gain on average during the fund-flows week (their second weekly market rise in a row) but suffered net outflows for the fourteenth consecutive week, handing back $1.2 billion this week. The Massachusetts Municipal Debt Funds (-$800,000) and Ohio Municipal Debt Funds (-$1 million) classifications witnessed the smallest net outflows of the group. The General & Insured Municipal Debt Funds classification witnessed the largest net outflows of the group, handing back $363 million, bettered by Short Municipal Debt Funds (-$204 million).

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