Despite Rise In Interest Rates, Investors Inject Net New Money Into Fixed Income ETFs

Investors were overall net purchasers of fund assets (including those of conventional funds and ETFs) for the first week in three, injecting a net $9.2 billion for the Refinitiv Lipper fund-flows week ended March 23.

Fund investors were net purchasers of equity funds (+$11.3 billion) and taxable bond funds (+$2.3 billion) while being net redeemers of money market funds (-$2.9 billion) and tax-exempt fixed income funds (-$1.5 billion) for the week.

Market Wrap-Up

Markets witnessed wild gyrations during the fund flows week as investors weighed the implications of aggressive interest hikes by the Federal Reserve, Russia continuing to wage war on Ukraine, and a late flows week spike in oil against some improving economic reports.

Despite a large one-day market decline on Wednesday, March 23, on the domestic side of the equation, the Nasdaq Composite Price Only Index (+3.62% for the week, but still down 11.01% YTD) posted the strongest returns of the other broadly followed U.S. indices for the fund flows week as investors appeared to snap up some deeply discounted securities.

It was followed by the S&P 500 Price Only Index (+2.26% and -6.50%, respectively). The Dow Jones Industrial Average Price Only Index (+0.87% and -5.45%, respectively) posted the lowest weekly return of the other U.S. indices for the week.

Overseas, the FTSE 100 Price Only Index (+3.62% and –1.45%, respectively) posted the strongest returns of the other often-followed broad-based international indices, while the Xetra DAX Total Return Index (-1.02% and -3.26%, respectively) was the group laggard.

On Thursday, March 17, the DJIA extended its winning streak to its fourth consecutive day, rising some 417 points as investors appeared to shrug off a 25-basis-point (bps) hike in the Fed’s benchmark interest rate the day before.

Investors instead focused on better-than-expected economic reports that showed first time claims for unemployment benefits from the week prior declined by 15,000 to 214,000 and February U.S. housing starts rose by 6.8%. Front-month crude oil prices rose 7.94%, closing the day out at $102.98 per barrel (bbl) and the 10-year Treasury yield rose one bp, closing at 2.20%.

The Dow witnessed another up-day, snapping its five-week losing streak on Friday, March 18, with all three major U.S. indices chalking up their largest one-week gains since November 2020 as investors appeared to bank on post-pandemic growth, continued low unemployment rates, and hopes for a decent Q2 earnings season, scheduled to start in the next few weeks.

Investors were, however, weighing hawkish comments by Fed officials after St. Louis Federal Reserve President Jim Bullard called for a 50-bps hike at the most recent FOMC meeting, explaining he wants the key lending rate at 3% by year-end.

Oil prices remained on the rise with front-month crude oil futures rising 1.7%, closing at $104.70/bbl, but still posted a weekly decline of 4.2% on Friday. The 10-year Treasury yield fell six bps to 2.14% as investors temporarily moved away from safe-haven assets.

The DJIA witnessed a 200-point decline on Monday, March 21, after Federal Reserve Chair Jerome Powell outlined the need to tighten monetary policy at a fast pace while speaking to the National Association for Business Economics. Powell said,

“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting, we’ll do so.”

The 10-year Treasury yield jumped 18 bps on the day to close at 2.32% – the highest closing value since May 24, 2019. Front-month crude oil futures rose 7.1% to settle at $112.12/bbl.

All three major U.S. indices rose on Tuesday, March 22, despite the hawkish comments by Bullard, Powell, and other Fed officials in their bid to tackle inflation – which is currently at a 40-year high – as investors hope for a soft landing. The 10-year Treasury yield jumped six bps to 2.38% as inflation remained a significant concern.

The Dow witnessed its worst daily decline in two weeks as oil prices jumped, new home sales declined, and more Fed officials warned of aggressive interest rate hikes to fend off rising inflation.

Front-month crude oil futures rose 2.8% to $114.93/bbl and the Census Bureau reported that February U.S. new-home sales fell 2% to an annual rate of 772,000. However, the 10-year Treasury yield declined six bps to close the day at 2.32%

Exchange-Traded Equity Funds

Equity ETFs witnessed their seventh consecutive week of net inflows, attracting $12.8 billion for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$11.4 billion), injecting money also for the seventh week in a row, while for the first week in three, nondomestic equity ETFs witnessed net inflows, taking in $1.4 billion this past week.

Large-cap ETFs (+$5.4 billion) attracted the largest draw of net new money, followed by the commodities heavy sector-other ETFs (+$2.4 billion) and international equity ETFs (+$1.3 billion). Meanwhile, sector-energy ETFs (-$422 million) suffered the largest net redemptions of the equity ETF macro-groups for the flows week.

The SPDR S&P 500 ETF (SPY, +$3.8 billion) and the Invesco QQQ Trust 1 ETF (QQQ, +$2.9 billion) attracted the largest amounts of net new money of all individual equity ETFs.

At the other end of the spectrum, the Invesco S&P 500 Equal Weight ETF (RSP, -$1.5 billion) experienced the largest individual net redemptions and the iShares Core S&P 500 ETF (IVV, -$939 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the fifth week in a row, taxable fixed income ETFs witnessed net inflows, taking in $5.2 billion this last week. APs were net purchasers of government-Treasury ETFs (+$3.3 billion), corporate investment-grade debt ETFs (+$1.9 billion), and flexible ETFs (+$1.1 billion), while being net redeemers of high-yield ETFs (-$1.9 billion).

The iShares 20+ Year Treasury Bond ETF (TLT, +$2.6 billion) and the iShares Short Treasury Bond ETF (SHV, +$564 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs.

Meanwhile, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG, -$776 million) and the SPDR Bloomberg High Yield Bond ETF (JNK, -$631 million) handed back the largest individual net redemptions for the week.

For the third consecutive week, municipal bond ETFs witnessed net inflows, with investors injecting $127 million this week. The VanEck High Yield Muni ETF (HYD, +$38 million) witnessed the largest draw of net new money of the municipal bond ETFs, while the PIMCO Intermediate Municipal Bond Active ETF (MUNI, -$27 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 seventh week in a row – redeeming $1.5 billion – with the macro group recording a market gain of 2.01% for the fund-flows week.

Domestic equity funds, suffering net redemptions of slightly less than $966 million, witnessed their seventh consecutive week of net outflows while experiencing a 2.05% market gain on average for the fund-flows week.

Nondomestic equity funds – posting a 1.92% weekly gain on average – observed their fourth straight week of net outflows, handing back $582 million this week.

On the domestic equity side, fund investors were net purchasers of large-cap funds (+$493 billion), while being net redeemers of real estate funds (-$424 million). Investors on the nondomestic equity side were net redeemers of international equity funds (-$279 billion) and global equity funds (-$303 million) for the week.

Conventional Fixed Income Funds

For the ninth week in a row, taxable bond funds (ex-ETFs) witnessed net outflows – handing back $2.8 billion this past week – while posting a 0.30% gain on average for the fund flows week.

Investors were net purchasers of flexible funds (+$387 million) and government Treasury funds (+$159 million) while being net redeemers of corporate investment-grade debt funds (-$1.7 billion), corporate high-yield funds (-$827 million), and government mortgage funds (-$352 million).

The municipal bond funds group posted a 0.50% loss on average during the week and witnessed its eleventh consecutive weekly net outflows, handing back $1.6 billion this week and marking its longest stretch of weekly net outflows since the week ended December 19, 2018.

General & Insured Municipal Debt Funds (-$470 million) and Intermediate Municipal Debt Funds (-$405 million) experienced the largest net outflows of the group.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.