Conventional Fund, ETF Investors Give Equity Funds Cold Shoulder During Fund Flows Week

By Tom Roseen

Investors were overall net purchasers of fund assets (including those of conventional funds and ETFs) for the second consecutive week, injecting a net $8.1 billion for the Refinitiv Lipper fund flows week ended Wednesday, July 13. Fund investors were net purchasers of money market funds (+$9.4 billion), taxable bond funds (+$1.6 billion), and tax-exempt fixed income funds (+$210 million) but were net redeemers of equity funds (-$3.1 billion) for the week.

Market Wrap-Up

The release of the June consumer-price index report, June’s nonfarm payrolls report, and the start of the second quarter corporate earnings season were investors’ primary focus during the most recent fund flows week. Nonetheless, on Wednesday, July 7, the S&P 500 Index and Nasdaq Composite booked a four-day winning streak – a feat not achieved since March – before succumbing to inflationary concerns despite an easing in commodity prices.

On the domestic side of the equation, the Russell 2000 (-0.09% for the flows week and down 23.95% YTD) mitigated losses better than the other broadly followed U.S. indices as the stock market struggled in the last four trading days. It was followed by the Dow Jones Industrial Average Price Only Index (-0.85% and -15.71%, respectively). The S&P 500 Price Only Index (-1.13% and -20.47%, respectively) posted the weakest returns. Overseas, the FTSE 100 Price Only Index (+1.01% and -17.06%, respectively) posted the strongest plus-side returns of the other often-followed broad-based international indices, while the Shanghai Composite (-2.39% and -14.84%, respectively) was rocked by news of yet another possibility of strict COVID-19 lockdowns and chalked up the weakest returns.

For the flows week, the S&P/LSTA Leverage Loan Index (+0.52% for the week and -4.42% YTD) posted stronger returns than the Bloomberg Municipal Bond Index (+0.34% and -7.68%, respectively) and the Bloomberg U.S. Aggregate Bond Index (+0.25% and -10.09%, respectively).

On Thursday, July 7, the S&P 500 and Nasdaq booked their longest winning streak (four days) since March ahead of Friday’s nonfarm payrolls report and Wednesday’s release of the consumer price index. With the recent decline in oil prices, investors appeared to be betting that the Fed might not be as aggressive with interest rate hikes as previously anticipated, even after learning that Federal Reserve Governor Christopher Waller said he supports a 75 basis point (bps) rate hike this month. The 10-year Treasury yield rose for the second day in a row, closing the day out at 3.01%. In other news, the Department of Labor reported that the number of first-time jobless claims rose 4,000 for the week prior and front-month crude oil futures rose 4.3% to $102.73/barrel (bbl).

The Nasdaq booked its longest winning streak since November, on Friday, July 8, while the other U.S. broad market indices suffered slight market declines after a better-than-expected nonfarm payrolls report. The U.S. Department of Labor reported the U.S. created 372,000 new jobs in June, beating analysts’ expectations of 250,000, and the unemployment rate remained unchanged at 3.6%. The report showed June average hourly earnings slowed on a year-over-year basis to 5.1% from 5.3% in May. The 10-year Treasury yield rose eight bps to close at 3.09%. Front-month crude oil futures prices rose 2.0% on the day – closing at $104.79/bbl but posted a weekly decline of 4.0%.

The U.S. market ended down on Monday, July 11, with stocks suffering their largest declines in more than a week, after investors learned of China’s new round of lockdowns in several cities to fight the new variant of COVID-19. In a flight to safety, investors pushed the 10-year Treasury yield down 10 bps to close at 2.99%. The two- and 10-year Treasury yield spread inverted by eight bps, with the two-year yield closing out the day at 3.07% – raising fears of a nascent economic slowdown. Front-month crude oil futures declined 70 cents to $104.09/bbl.

Stocks tanked again on Tuesday, July 12, ahead of Wednesday’s June inflation report and the beginning of the Q2 corporate earnings season on Thursday. Investors’ mood was not helped by release of economic data from the National Federation of Independent Business, which reported its small-business optimism index fell 3.6 points to 89.5, its lowest value since the first few months of the pandemic in 2020. The 10-year Treasury yield declined an additional three bps to end the day at 2.96%. Front-month crude oil futures finished down 7.93% to $95.84/bbl.

U.S. stocks suffered their fourth day of declines, on Wednesday, July 13, after the consumer price index showed inflation at a near 41-year high. Rising gasoline prices in June pushed U.S. inflation to 9.1% year-over-year. The June CPI rose 1.3% for the month – its third month in four breaking through the one percent mark. As a result, the CME FedWatch Tool showed a greater than 80% probability that the Fed will hike its key lending rate by 100 bps during its meeting this month. The 10-year Treasury yield declined five bps to 2.91% and the two- and 10-year Treasury yield spread inverted further (22 bps – its largest since at least January 22, 2007), with the two-year Treasury yield closing the day out at 3.13%.

Exchange-Traded Equity Funds

Equity ETFs witnessed their fifth consecutive week of net outflows, handing back $1.5 billion for the most recent fund flows week. Authorized participants (APs) were net sellers of domestic equity ETFs (-$1.8 billion), withdrawing money for the third week in a row, while nondomestic equity ETFs witnessed their third straight week of net inflows, though they took in a paltry $272 million this past week. The commodities focused, sector-other ETFs (-$3.1 billion) suffered the largest net outflows, bettered by small-cap ETFs (-$2.01 billion). Meanwhile, large-cap ETFs (+$2.8 billion) witnessed the largest net inflows of the equity ETF macro-groups for the flows week, followed by equity income ETFs (+$702 million).

Invesco QQQ Trust 1 ETF (QQQ, +$1.7 billion) and iShares Core S&P 500 ETF (IVV, +$952 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, iShares Russell 2000 ETF (IWM, -$1.2 billion) experienced the largest individual net redemptions and Consumer Discretionary Select Sector SPDR ETF (XLY, -$564 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 $6.3 billion this week. APs were net purchasers of government-Treasury ETFs (+$5.0 billion) and flexible ETFs (+$922 million), while being net redeemers of corporate high-yield debt ETFs (-$69 million) and government-mortgage ETFs (-$54 million). iShares 10-20 Year Treasury Bond ETF (TLH, +$1.7 billion), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, +$1.2 billion), and iShares 20+ Year Treasury Bond ETF (TLT, +$849 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares Interest Rate Hedged Corporate Bond ETF (LQDH, -$358 million) and WisdomTree Floating Rate Treasury ETF (USFR, -$290 million) handed back the largest individual net redemptions for the week.

For the first week in four, municipal bond ETFs witnessed net outflows, with investors redeeming $265 million this week. iShares Short-Term National Muni Bond ETF (SUB, +$110 million) witnessed the largest draw of net new money of the municipal bond ETFs, while iShares National Muni Bond ETF (MUB, -$139 million) experienced the largest net redemptions in the subgroup for the week.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net sellers of equity funds for the twenty-third week in a row – redeeming $1.6 billion – with the macro-group recording an average market loss of 0.95% for the fund flows week. Domestic equity funds, suffering net redemptions of slightly less than $1.2 billion, also witnessed their twenty-third consecutive week of net outflows while chalking up a 1.10% market loss on average for the fund flows week. Nondomestic equity funds – posting a 0.58% weekly loss on average – observed their fourteenth straight week of net outflows, handing back $440 million this week.

On the domestic equity side, fund investors were net redeemers of mid-cap funds (-$357 million), small-cap funds (-$217 million), and the commodities heavy, sector-other funds (-$213 million). Investors on the nondomestic equity side were net redeemers of international equity funds (-$339 million) and global equity funds (-$101 million) for the week.

Conventional Fixed Income Funds

For the twenty-fifth week in a row, taxable bond funds (ex-ETFs) witnessed net outflows – handing back $4.6 billion this past week – while posting a 0.03% loss on average for the fund flows week. Flexible funds witnessed the largest net inflows of the group, attracting a net $964 million, followed by government-Treasury funds (+$178 million) and government-mortgage funds (+$130 million). However, corporate investment-grade debt funds (-$3.3 billion) suffered the largest net redemptions for the week, bettered by international & global debt funds (-$1.1 billion), and corporate high-yield funds (-$583 million).

The municipal bond funds group posted a 0.20% gain on average during the fund flows week (their fourth consecutive week of plus-side performance) and attracted net new money for the first week in six, taking in $471 million this week. General & Insured Municipal Debt Funds (+$218 billion) and High Yield Municipal Debt Funds (+$214 billion) experienced the largest net inflows of the group. However, year to date, the municipal bond funds macro-group handed back $92.8 billion – witnessing the largest net redemption thus far of any full year dating back to 1992 when Lipper began calculating weekly estimated net flows.

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