U.S. Weekly Fund Flows: Investors Prefer ETFs Over Mutual Funds As Interest Rates Increase

During Refinitiv Lipper’s fund flows week ended May 4, 2022, investors were overall net redeemers of fund assets (including both conventional funds and ETFs) for the fourth week in five, withdrawing a net $11.5 billion from the market.

Money market funds (+$966 million) reported the only weekly inflows, as taxable bond funds (-$7.5 billion), tax-exempt bonds (-$2.7 billion), and equity funds (-$2.3 billion) suffered weekly outflows.

Index Performance

At the close of Refinitiv Lipper’s fund flows week, U.S. broad-based equity indices traded positive-Nasdaq (+3.81%), Russell 2000 (+3.50%), S&P 500 (+2.78%), and DJIA (+2.28%).

Fixed income indices continue to struggle, both the Bloomberg U.S. Aggregate Bond Index (-0.55%) and Bloomberg Municipal Bond Index (-0.52%) realized their ninth consecutive negative weekly performance.

Overseas broad market indices traded positive-Shanghai Composite (+2.52%), DAX 30 (+1.58%), FTSE 100 (+0.89%), and Nikkei 225 (+0.34%).

Rates/Yields

The 10-two Treasury yield spread rose over the week (+24.07%). Treasury yields along the yield curve saw moderate increases-two- (+1.51%), five- (+2.88%), 10- (+3.44%), and 30-year (+3.23%).

As of May 5, the average contract rate for U.S. 30-year fixed-rate mortgages with conforming loan balances rose to 5.27%-the highest level since 2009. Both the United States Dollar Index (DXY, -0.36%) and VIX (-24.31%) decreased over the course of the week.

Market Recap

Our fund flows week kicked off Thursday, April 28, with United States gross domestic product (GDP) unexpectedly falling at an annual rate of 1.4% in the first quarter-it was the first drop since the second quarter of 2020. The Q1 contraction came as many economists forecasted 1.1% growth. Treasury Secretary Janet Yellen has warned of continued “large negative shocks” that will “likely to continue to challenge the economy.” The U.S. Dollar Index, which measures the currency’s relative strength against other developed world currencies, climbed 1% to its highest level since 2002. Equity markets ended the session strong across the board-Nasdaq (+3.06%), S&P 500 (+2.47%), DJIA (+1.85%), and Russell 2000 (+1.80%).

On Friday, April 29, the Department of Commerce reported that Personal Consumption Expenditures (PCE) increased 1.1% from February marking the largest monthly gain since October. The PCE price index has jumped 6.6% over the past 12 months, which is the largest annual increase since January 1982. Core-PCE, excluding food and energy, however, was only up 5.2% on an annual basis-down from February’s 5.3% jump. U.S. equity markets tumbled to end the month, and both the Nasdaq and S&P 500 closed April at their lowest levels of the year. The Nasdaq (-4.17% on the day) recorded its worst monthly performance since 2008. In the bond market, shorter-dated yields continued to rise-the two- (+2.00%) and three-year (+1.49%) Treasury yields.

On Monday, May 2, the 10-year U.S. Treasury yield increased to above 3.0% for the first time since December 2018 as market participants anticipate a 50-basis point (bps) interest rate hike from the Federal Reserve. The April Purchasing Managers Index (PMI) was published, showing a seven-month high, despite significant price increases. The seasonally-adjusted PMI for April came in at 59.2, up from March’s 58.8. Growth was attributed to an increase in new orders and overall demand at the start of the second quarter. While demand remains high, concerns of geopolitical turmoil and inflation have the positive sentiment level fall to a six-month low. Equity markets bounced back from Friday’s rough session-Nasdaq (+1.63%), Russell 2000 (+1.01%), S&P 500 (+0.57%), and DJIA (+0.26%).

Tuesday, May 3, investors awaited the outcome of the Federal Reserve’s two-day meeting where they anticipate a policy rate hike of 50 bps. The two- and three-year Treasury yields rose while longer-dated yields fell on the day. The Department of Labor published its March Job Openings and Labor Turnover Survey (JOLTS), which reported record highs for both job openings (11.55 million) and job quits (4.54 million)-dating back to when the data began in 2000. The most quits came from professional and business services (+88,000) and construction (+69,000). Natural gas futures came close to 14-year highs as many believe supply will continue to struggle with increasing demand. The March CoreLogic Home Price Index reported that home prices rose 20.9% over the last 12 months, its largest increase since the data first was published in 1976. The cities with the largest annual increases were Phoenix (+30.4%), Las Vegas (+27.4%), and San Diego (+25.8%). Equity markets saw slight increases on the day, led by the Russell 2000 (+0.85%).

Our fund flows week wrapped up Wednesday, May 4, with the spotlight on the Federal Reserve policymakers. It was decided that the Fed will raise rates by 50 bps for the first time in more than 20 years. While the increase was expected, Fed Chair Jerome Powell’s comments were not. As a pleasant surprise to the markets, Powell noted that bigger hikes were not in the Fed’s future plans. Policymakers also announced their intention to reduce the $9 trillion balance sheet beginning on June 1, 2022. ADP reported that 247,000 private-sector jobs were introduced in April. Large- and medium-sized businesses had created 367,000, while small businesses lost 120,000. Equity markets reacted strongly to the rate hike, as the two- and three-year Treasury yields fell 5.56% and 5.02%, respectively.

Exchange-Traded Equity Funds

Exchange-traded equity funds recorded $2.3 billion in weekly net inflows, marking their first weekly inflow in four weeks. The macro-group posted a positive return of 2.80% on the week, the second week of positive performance in three.

Equity income ETFs (+$1.3 billion), growth/value-aggressive ETFs (+$784 million), growth/value-small cap ETFs (+$618 million), and sector-utilities ETFs (+$555 million) were the largest equity ETF subgroups to post inflows this week. Equity Income ETFs realized a positive 2.20% on the week as they observed their seventh consecutive week of inflows. Equity Income ETFs are coming off their largest quarterly inflows on record (+$19.4 billion) in Q1 2022. Growth/value-aggressive ETFs ended a three-week slide of outflows as they logged their best performing week in two months (+3.14%).

Sector-financial/banking ETFs (-$559 million), sector-technology ETFs (-$489 million), and growth/value-large cap ETFs (-$405 million) were the top flow detractors under the macro-group. Sector-financial/banking ETFs posted their second straight week of outflows as they come off their eighth largest weekly outflows to date last week. Their four-week flow moving average has been negative for the last 10 weeks. Sector-technology ETFs have logged outflows in four of the last five weeks.

Over the past fund flows week, the top three equity ETF flow attractors were Schwab Fundamental U.S. Large Company Index ETF (FNDX, +$1.2 billion), Schwab Fundamental U.S. Small Company Index ETF (FNDA, +$892 million), and ProShares UltraPro QQQ ETF (TQQQ, +$813 million).

Meanwhile, the bottom three equity ETFs in terms of weekly outflows were SPDR S&P 500 ETF (SPY, -$2.2 billion), Schwab Strategy: US Large Cap ETF (SCHX, -$1.7 billion), and Schwab Strategy: US Small Cap ETF (SCHA, -$687 million).

Exchange-Traded Fixed Income Funds

Exchange-traded fixed income funds observed $885 million in weekly net inflows-the macro-group’s third straight week of inflows. Fixed income ETFs reported a weekly return of negative 0.55% on average-the macro-group’s ninth straight week of sub-zero performance.

Government-Treasury ETFs (+$1.6 billion) and international & global debt ETFs (+$448 million) were the only attractors of capital under fixed income ETFs of more than $1 million. Government-Treasury ETFs posted their tenth weekly inflow over the last 11 weeks, despite suffering a negative weekly performance (-0.51%) for the eighth straight week. This subgroup has logged 10 straight weeks with a four-week inflow moving average of more than $1.0 billion.

Flexible funds ETFs (-$669 million), corporate-high yield ETFs (-$293 million), and government-mortgage ETFs (-$113 million) witnessed the largest outflows under the fixed income ETF macro-group. Flexible fund ETFs have logged five straight weeks of outflows paired with three weeks of negative weekly performance in the last four. Corporate-high yield ETFs have witnessed four weeks of outflows over the past five.

Schwab Intermediate-Term U.S. Treasury ETF (SCHR, +$2.1 billion) and SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, +$1.0 million) attracted the largest amounts of weekly net new money for taxable fixed income ETFs.

On the other hand, Schwab Strategy: U.S. TIPS ETF (SCHP, -$2.9 billion) and iShares: TIPS Bond ETF (TIP, -$791 million) suffered the largest net weekly outflows.

Conventional Equity Funds

Conventional equity funds (ex-ETFs) witnessed weekly outflows (-$4.6 billion) for the thirteenth straight week. Conventional equity funds posted a weekly return of positive 2.50%. This is the tenth straight week the macro-group has observed a four-week outflow moving average of more than $2.2 billion.

International equity (-$1.9 billion), growth/value-aggressive (-$837 million), global equity (-$587 million), and growth/value large-cap (-$297 million) were the largest subgroup outflows under conventional equity funds. International equity conventional funds have logged three straight weeks of outflows, all greater than $1.4 billion. The subgroup is coming off its worst month since February 2021.

Sector-other funds (+$95 million), sector-utilities (+$29 million), and gold and natural resources funds (+$25 million) were the largest attractors of capital over this fund flows week. Sector-other conventional funds have now realized seven consecutive weeks of inflows as they reported a positive 1.48% on average over the week. Gold and natural resources funds observed their fourth straight week of inflows. This subgroup posted its largest quarterly intake since 2016 during Q1 2022.

Conventional Fixed Income Funds

Conventional fixed income funds realized a weekly outflow of $8.4 billion-marking their fifteenth straight week of outflows. The subgroup has produced a negative four-week flow moving average of at least $1.3 billion in 14 consecutive weeks. Their current four-week flow moving average of negative $6.9 billion is the lowest level since March 2020. The macro-group recorded a positive 0.09% on average-their first week in five of plus-side performance.

Corporate-investment grade (-$6.0 billion), corporate-high yield (-$809 million), international & global debt (-$734 million), and government-mortgage (-$689 million) led the macro-group in outflows. Conventional corporate-investment grade funds hit their largest outflow total since the first week of March 2020 and have now suffered 12 consecutive weeks of outflows. Government-mortgage funds found themselves logging their largest outflow since September 2020 while realizing negative flows for 15 straight weeks.

The only subgroups to report weekly inflows were government-Treasury (+$297 million), flexible funds (+$124 million), and corporate-high quality (+$65 million). Conventional government-Treasury funds now have eight weeks of positive flows in nine, despite suffering a negative 0.65% as a group on the week. Conventional flexible funds realized a positive 0.62% as they ended five weeks of weekly outflows.

Municipal bond funds (ex-ETFs) returned a negative 0.42% over the fund flows week-their ninth negative weekly performance in a row. The subgroup experienced $3.3 billion in outflows, marking their seventeenth consecutive week of outflows and the third largest outflow of the year. The subgroup has logged 14 straight weeks with a four-week moving outflow average of greater than $1.1 billion. Conventional municipal bond funds only recorded five total weeks of net outflows in all of 2021.

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