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January 11, 2024

U.S. Weekly FundFlows Insight Report: Equity ETFs Suffer First Weekly Redemption in 15 Weeks—Conventional Equity Funds Witness Their Hundredth Week of Net Redemptions

by Tom Roseen.

Investors were net sellers of fund assets (including those of conventional funds and ETFs) for the first week in three, redeeming a net $2.1 billion for the LSEG Lipper fund-flows week ended Wednesday, January 10, 2024.

Fund investors were net purchasers of fixed income funds (+$5.5 billion) and money market funds (+$4.3 billion), while being net redeemers of mixed-assets funds (-$328 million), alternatives funds (-$458 million), commodity funds (-$1.5 billion), and equity funds (-$9.6 billion) for the week.

Market Wrap-Up

After witnessing a dismal beginning of the first three trading days of 2024 and ignoring the often-cited January effect, investors cautiously dipped their collective toes back into the water during the Lipper fund-flows week.

On the domestic equity side of the equation, the Nasdaq Composite (+2.59%) posted the strongest return of the often-followed broad-based U.S. indices, followed by the S&P 500 (+1.67%) and the Dow Jones Industrial Average (+0.71%). The Russell 2000 (+0.56%) posted the smallest gains of the group. Overseas, the Nikkei 225 (+1.50%) moved to the top of the leaderboard of the often-followed broad-based international indices, followed by the DAX Total Return Index (+1.49%) and the FTSE 100 (+0.45%). Meanwhile, the Shanghai Composite (-3.39%) posted the only losses of the subgroup for the flows week.

The Morningstar LSTA U.S. Leveraged Loan Index (+0.19%) outperformed the Bloomberg Municipal Bond Index (-0.21%) and the Bloomberg U.S. Aggregate Bond Index (-0.50%) for the fund-flows week.

For the week, the Treasury yield rose at the long end of the curve, with the 30-year yield witnessing the largest increase, rising 15 basis points (bps) to 4.20%. The 10-year Treasury yield rose 13 bps for the week—settling at 4.04%. The two-month Treasury yield witnessed the largest decline, falling eight bps to 5.46%. The U.S. Treasury yield curve remained inverted, with the two- and 10-year Treasury yield spread (-33 bps) narrowing by nine bps during the week.

On Thursday, January 4, the Nasdaq Composite logged its longest losing streak since October 2022 (five consecutive down trading days), as investors did a little profit taking after a strong runup in 2023. Heightened concerns over Middle East tensions, heady equity valuations toward year end, and slightly more hawkish views by Federal Reserve officials weighed on investors. In the minutes from the Fed’s December meeting released on Wednesday, Fed officials conveyed some uncertainty about the path of monetary policy but embraced waning inflation figures. Nonetheless, fed-funds futures traders still priced in a 62.1% probability the Fed would cut its key lending rate by 25 bps by the end of March, according to the CME FedWatch Tool. Some investors attributed the selloff to year-end tax loss harvesting. The 10-year Treasury yield rose eight bps on the day to close at 3.99%.

After a rocky start in trading during the first week of 2024, U.S. stocks rose on Friday, January 5, but still snapped a nine-week winning streak with all three broad-based U.S. indices declining for the week. The Russell 2000 (-3.75%) and Nasdaq (-3.25%) suffered the largest declines for the week. Investors stepped back into the market on Friday after the Bureau of Labor Statistics reported that the U.S. added 216,000 jobs in December, handily beating analysts’ expectations of 170,000. The unemployment rate remained steady at 3.7%, while hiring for October and November were revised downward. In other news, the December Institute of Supply Management services index fell to 50.6 from 52.7 the month before.  The 10-year Treasury yield rose six bps to finish the day at 4.05%.

The three U.S. broad-based indices ended higher on Monday, January 8, as bond yields pulled back. Investors remained a bit subdued as they looked forward to the release of consumer price index data on Thursday, the beginning of the Q4 corporate earnings season, and digested comments made by Dallas Fed President Lorie Logan over the weekend. Logan said it was a bit too early to take rate increases off the table as inflation continues to remain above the 2% target rate. The 10-year Treasury yield declined four bps to 4.01%.

The DJIA snapped its three-day winning streak on Tuesday, January 9, after investors got the opportunity to evaluate the ramifications of the stronger-than-expected nonfarm payrolls report from Friday and how recent news might play into the Fed’s decision to cut interest rates in the near term. On Monday, Fed Governor Michelle Bowman said inflation could pull back without additional rate hikes, but the economy was not at the point where rate cuts were yet needed.  The 10-year Treasury yield crept up one bp on the day.

U.S. stocks finished higher on Wednesday, January 10, with the S&P 500 closing just 13 points shy of its record high reached in January 2022, as investors continued to bet on disinflation in the U.S. economy ahead of the CPI report due out this week and ahead of a few high-profile banks kicking off the unofficial start to the Q4 earnings season on Friday. Dampening some of the recent interest-rate-cut enthusiasm, New York Fed President John Williams said interest rates will likely need to stay high “for some time” until Fed officials are confident with inflation returning to 2%.

Exchange-Traded Equity Funds

Equity ETFs witnessed net outflows for the first week in 15, handing back a little less than $3.5 billion for the most recent fund-flows week. Authorized participants (APs) were net sellers of domestic equity ETFs (-$3.6 billion), redeeming money also for the first week in 15, while nondomestic equity ETFs witnessed net inflows for the third week in a row, albeit taking in only $105 million this past week.

Domestic sector equity ETFs (+$1.5 billion) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by equity income ETFs (+$809 million) and developed international markets ETFs (+$654 million). Meanwhile, large-cap ETFs (-$5.8 billion) suffered the largest net outflows, bettered by the world sector equity ETFs (-$415 million) and small-cap ETFs (+$299 million) macro-groups.

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

Mixed-assets ETFs (+$28 million) witnessed the only net inflows of the other equity-based macro-classifications, followed by the alternatives ETFs (-$667 million) and commodities ETFs (-$1.4 billion) macro-classifications for the week.

iShares Core S&P 500 ETF (IVV, +$2.4 billion) and Invesco QQQ Trust Series 1 (QQQ, +$1.3 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, -$9.2 billion) experienced the largest individual net redemptions and iShares Russell 2000 ETF (IWM, -$1.8 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the third consecutive week, taxable fixed income ETFs experienced net inflows, taking in $4.7 billion this week. APs were net purchasers of general domestic taxable fixed income ETFs (+$5.0 billion), government & Treasury fixed income ETFs (+$1.6 billion), and short/intermediate investment-grade debt ETFs (+$625 million) while being net redeemers of short/intermediate government & Treasury ETFs (-$3.2 billion) and emerging markets debt ETFs (-$496 million).

iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, +$3.5 billion), iShares 20+ Year Treasury Bond ETF (TLT, +$700 million), and SPDR Bloomberg High Yield Bond ETF (JNK, +$412 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, US Treasury 3 Month Bill ETF (TBIL, -$2.7 billion) and US Treasury 6 Month Bill ETF (XBIL, -$544 million) handed back the largest individual net redemptions for the week.

Municipal bond ETFs witnessed net outflows for the second week in a row, handing back $939 million this week. Invesco National AMT-Free Municipal Bond ETF (PZA, +$79 million) witnessed the largest draw of net new money of the municipal bond ETFs, while iShares National Muni Bond ETF (MUB, -$1.0 billion) experienced the largest net redemptions in the subgroup.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net sellers of equity funds for the hundredth week in a row—redeeming $6.2 billion—with the macro-group posting a 1.05% market return for the fund-flows week. Domestic equity funds—suffering net redemptions of slightly less $5.2 billion—witnessed their one hundred-and-first consecutive week of net outflows while posting a 1.31% market rise on average for the fund-flows week. Nondomestic equity funds—posting a 0.50% weekly market gain on average—observed their forty-fourth week of net outflows in a row, handing back slightly more than $1.0 billion this week.

On the domestic equity side, fund investors were net redeemers of large-cap funds (-$2.1 billion), mid-cap funds (-$981 million), and equity income funds (-$885 million). Investors on the nondomestic equity side were net sellers of developed international markets funds (-$595 million) and developed global equity funds (-$197 million) for the week.

Conventional Alternatives, Commodities, and Mixed-Assets Funds

Conventional alternatives funds (+$209 million) witnessed the only net inflows of the other equity-based macro-classifications, followed by the commodities funds (-$42 million) and mixed-assets funds (-$356 million, excluding funds of funds) macro-classifications for the week.

Conventional Fixed Income Funds

Taxable bond funds (ex-ETFs) witnessed net inflows for the second week in a row, taking in $768 million this past week—while posting a 0.14% market decline on average for the fund-flows week. The short/intermediate government & Treasury funds macro-group witnessed the largest net inflows for the week—taking in $382 million, followed by alternative bond funds (+$244 million) and short/intermediate investment-grade debt funds (+$213 million). Government & Treasury fixed income funds (-$113 million) suffered the largest net redemptions, bettered by high yield funds (-$90 million) and emerging markets debt funds (-$63 million).

The municipal bond funds group posted a 0.07% market loss on average during the fund-flows week (their first weekly market decline in 11) but witnessed net inflows for the first week in 23, attracting $978 million this week (their largest weekly net inflows since February 1, 2023). The High Yield Municipal Debt Funds (+$490 million) and General & Insured Municipal Debt Funds (+$270 million) classifications witnessed the largest net inflows of the group. The Other States Municipal Debt Funds classification witnessed the largest net outflows of the group—handing back $8 million—bettered by Virginia Municipal Debt Funds (-$1 million).

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