The Appetite for Risk: Big Inflows into US Equity Funds, New Mortgage ETF

Emerging Portfolio Research [EPFR] reported that fund flows during the second week of March were shaped by big inflows into US Equity Funds that were driven by a single US exchange traded fund [ETF] investing in large cap stocks, more ambivalence about the prospects for emerging equity markets – especially those in Asia – and the rapid recovery of fixed income investors’ appetite for risk. The diversified Global Equity Funds and ETFs continued their winning ways.

U.S. numbers were driven by the $11.8 billion that flowed into the SPDR S&P 500 ETF (SPY) during the week the most significant number may be the $130 million that investors pulled out of Balanced Funds which invest in both equity and fixed income, as they ended their nine week winning streak. These funds and ETFs usually fare best when risk appetite is low. Global Utilities ETFs and funds saw their winning streak extended to seven straight weeks as investors continue to gravitate to this traditionally defensive sector.

On Friday, the iShares Lehman MBS Fixed-Rate Bond ETF (MBB) was launched despite all the attention on weakness in mortgage markets. The ETF tracks an index of investment grade fixed-rate mortgage-backed securities of government-sponsored mortgage issuers such as Ginnie Mae and Freddie Mac. Importantly, this new ETF does not hold riskier subprime loans, which are designed for lower-income homebuyers with weaker credit scores who don't meet banks' strictest lending standards.