U.S. FundFlows Insight Report: APs Ignore Hawkish Tone By Fed

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Includes: DBEF, IVV, IWM, QQQ, SPY
by: Lipper Alpha Insight

By Tom Roseen

In the heat of the second-quarter earnings season, investors took a break from the recent market rally, bidding up defensive issues before the Federal Reserve's July FOMC meeting statement. While most pundits didn't expect a rate increase as a result of the meeting, increases in June employment numbers and some better-than-expected economic news have investors contemplating a possible September rate hike and a more hawkish stance by the Fed.

Early in the flows week, the Dow Jones Industrial Average snapped on Thursday, July 21, a nine-day run of gains (its longest since March 2013) as investors cooled their heels ahead of the central bank's two-day meeting, scheduled to start on July 26. Helping support the idea of a more hawkish Fed, the number of Americans applying for first-time unemployment benefits had declined the prior week to its second lowest level in the last seven years, existing home sales were on the rise, and the Conference Board's index of leading economic indicators rose 0.3% for June. Despite investors becoming slightly more defensive during the week, bidding up utilities and telecom issues, the NASDAQ Composite posted its highest close for 2016 on Friday, July 15, shoring up a fourth week of gains for U.S. stocks, as a set of better-than-expected earnings reports pushed equities higher and the European Central Bank left its monetary policy unchanged. A drop in oil, a busy earnings reporting week, and the upcoming FOMC meeting pressured stocks on Monday. However, on Tuesday, a rise in new homes sales to a seven-year high and news from the Conference Board that consumer confidence held steady helped catapult the NASDAQ to another 2016 closing high. Despite the Fed's signaling on Wednesday a willingness to raise its benchmark rate in the fall, a drop in near-month crude oil prices and poor durable goods data pushed the probability of a September rate hike lower than before the FOMC statement.

For the second week in three, fund investors were net purchasers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting a net $4.4 billion for the fund-flows week. As might be expected, given the uncertainty in the market, investors padded the coffers of money market funds (+$4.8 billion), taxable bond funds (+$2.8 billion), and municipal bond funds (+$0.8 billion), while they were net redeemers of equity funds (-$4.1 billion).

However, for the fourth consecutive week, equity ETFs witnessed net inflows, taking in $3.1 billion for the flows week ended Wednesday, July 27. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$3.2 billion), injecting money into the group for the fourth week running, while for the first week in three non-domestic equity ETFs witnessed net redemptions, handing back $118 million this past week. The SPDR S&P 500 ETF (NYSEARCA:SPY) (+$1.8 billion), the iShares Core S&P 500 ETF (NYSEARCA:IVV) (+$697 million), and the PowerShares QQQ Trust 1 ETF (NASDAQ:QQQ) (+$389 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, the iShares Russell 2000 ETF (NYSEARCA:IWM) (-$1.3 billion) experienced the largest net redemptions, while the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA:DBEF) (-$481 million) suffered the second largest net redemptions for the week.

For the twentieth week running, conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $7.1 billion from the group. Domestic equity funds, handing back a little less than $5.2 billion, witnessed their twenty-fifth consecutive week of net outflows and posted a weekly performance decline of 0.06%. Meanwhile, their non-domestic equity fund counterparts, posting a 0.51% gain for the week, also witnessed net outflows (-$1.9 billion) for a fifth consecutive week. On the domestic side, investors lightened up on large-cap funds and small-cap funds, redeeming a net $3.6 billion and $0.7 billion, respectively. On the non-domestic side, international equity funds witnessed $1.7 billion of net outflows.

For the third consecutive week, taxable bond funds (ex-ETFs) witnessed net inflows, taking in a little under $2.5 billion. Corporate investment-grade debt funds witnessed the largest net inflows, taking in $1.2 billion, while international and global debt funds witnessed the second largest net inflows (+$0.9 billion) of the macro-group, with emerging markets debt funds attracting $774 million, their largest weekly net inflows since Lipper began tracking weekly flows in 1992. Government Treasury & mortgage funds and government mortgage funds witnessed the only net redemptions of the macro-group, handing back $54 million and $20 million, respectively, for the week. For the forty-third consecutive week municipal bond funds (ex-ETFs) witnessed net inflows, attracting some $0.6 billion this past week.