By Tim Roseen
The markets rallied during the fund-flows week ended April 20, despite major oil producers' failure to agree on a production freeze over the weekend. The major U.S. indices hit new 2016 highs during the week as investors cheered a drop in unemployment claims (the lowest since 1973), and banks rallied after oil strengthened and the dollar continued to weaken against its major trading partners. The rally was supported by companies broadly beating lower expectations at the beginning of this quarter's earnings reporting season and on news that China's first-quarter GDP growth of 6.7% was in line with expectations. While U.S. industrial output for March declined for the sixth month in seven - supporting fears of weakness in the manufacturing sector, the Empire State Index for April jumped to its highest level in over a year - showing signs of improving business activity in the New York Federal Reserve district. Modest declines in U.S. oil rig counts during the week and a reported labor strike in Kuwait helped prop up crude oil prices, despite a failed freeze agreement during the Doha, Qatar talks over the weekend.
During the week, the Dow Jones Industrial Average closed above the 18,000 mark for the first time in nine months as investors kept their attention on better-than-expected earnings reports, despite the oil price dropping once again below $40/barrel. Investors appeared to be willing to take on more risk, bidding up emerging markets and out-of-favor sectors, with energy, materials, and industrials chalking up strong returns for the year to date. While IBM (NYSE:IBM), Netflix (NASDAQ:NFLX), and other tech firms' earnings disappointed the markets at the end of the flows week, weighing on tech issues, a sixth straight week of declines in domestic oil supplies and a strong rebound in March existing home sales helped push U.S. stocks to 2016 closing highs and oil to a $42.63/barrel close.
Nonetheless, for the week, fund investors were net redeemers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), pulling out a net $32.4 billion for the fund-flows week ended Wednesday, April 20. The headline number, however, was slightly misleading. Investors padded the coffers of taxable bond funds (+$3.5 billion) and municipal bond funds (+$0.6 billion) while being net redeemers of money market funds (-$32.0 billion) and equity funds (-$4.5 billion).
For the second week in a row, equity ETFs witnessed net outflows, handing back $1.6 billion. Despite the equity rally during the week, authorized participants (APs) were net redeemers of domestic equity ETFs (-$1.2 billion), withdrawing money from the group for the first week in eight. As a result of the impasse between oil-producing nations for an output freeze, APs - for a second consecutive week - were also net redeemers of non-domestic equity ETFs (-$0.4 billion). The Industrial Select Sector SPDR ETF (NYSEARCA:XLI) (+$401 million), SPDR S&P Retail ETF (NYSEARCA:XRT) (+$400 million), and SPDR MidCap 400 ETF (+$322 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR S&P 500 ETF (NYSEARCA:SPY) (-$2.9 billion) experienced the largest net redemptions, while PowerShares QQQ Trust 1 (NASDAQ:QQQ) (-$641 million) suffered the second largest redemptions for the week.
For the sixth week running, conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $2.9 billion from the group. Domestic equity funds, handing back $2.6 billion, witnessed their eleventh consecutive week of net outflows, while posting a weekly gain of 1.04%. Meanwhile, their non-domestic equity fund counterparts, posting a 1.33% return for the week, also witnessed net outflows (-$290 million) for a third week in four. On the domestic side, investors lightened up on large-cap funds and small-cap funds, redeeming a net $2.0 billion and $440 million, respectively. On the non-domestic side, international equity funds witnessed $264 million of net outflows.
For the third week in a row, taxable bond funds (ex-ETFs) witnessed net inflows, taking in a little over $1.7 billion. Corporate investment-grade bond funds witnessed the largest net inflows, taking in $0.7 billion (for their third week in a row of net inflows), while government Treasury and mortgage funds witnessed the second largest net inflows (+$0.4 billion) of the macro-group. Flexible portfolio funds witnessed the only net redemptions of the group, handing back $211 million for the week. For the twenty-ninth week in a row, municipal bond funds (ex-ETFs) witnessed net inflows, taking in $425 million this past week.