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U.S. Weekly FundFlows Insight Report: Investors Embrace Fixed Income Funds During The Week

by: Tom Roseen

For the first week in four, investors were net redeemers of fund assets (including those of conventional funds and ETFs), withdrawing $1.6 billion for Thomson Reuters Lipper's fund-flows week ended August 15, 2018. However, fund investors continued to pad the coffers of taxable bond funds (+$798 million) and municipal bond funds (+$452 million), while being net redeemers of money market funds (-$2.2 billion) and equity funds (-$639 million).

Market Wrap-Up

As the tug of war between China and the U.S. over tariffs continued, news of Turkey's currency crisis put the spotlight on global risks during the fund-flows week and weighed heavily on the global markets. The Russell 2000 Price Only Index (-0.96%) and the S&P 500 Price Only Index (-1.38%) managed to mitigate losses better than the other domestic broad-based indices, while the Dow Jones Industrial Average (DJIA) Price Only Index (-1.65%) was the laggard. Overseas, investors worried about the impact Turkey's lira crisis might have on European banks with greater exposure to the currency. The Xetra DAX Total Return Index (-6.14%) posted the largest decline of the broadly followed indices, bettered by the FTSE 100 Price Only Index (-5.18%) and the Shanghai Composite Price Only Index (-1.79%).

At the beginning of the flows week, weakness in energy and industrial stocks caused U.S. stocks to close mostly lower. Bucking the trend, the NASDAQ Composite rose modestly on the day to post its eighth consecutive winning session. Despite a decline in the initial jobless claims report from the prior week and the flat July producer price index reading, the tit-for-tat back and forth between the U.S. and China over tariffs weighed on investor psyche. On Friday, August 10, the S&P 500 and the DJIA witnessed their largest one-day drops since late June and mid-July, respectively, amid a growing currency crisis in Turkey - year to date the Turkish lira has declined over 40% against the U.S. dollar. An increase in market volatility in Russia added to the mounting global angst as newly announced U.S. sanctions weighed on Russia's currency and stocks. Of some import domestically, a 0.2% increase in July core CPI may have caused some hesitation as the 12-month core inflation rate rose to 2.4%, its highest level since 2008.

On Monday, August 13, the markets continued to struggle as the mayhem in Turkey curbed investors' appetite for risky assets and investors focused on the possible contagion to other emerging markets and exposed European banks. However, after Turkey's central bank committed on Tuesday to provide all the liquidity the country's financial institutions need, U.S. stocks closed higher - snapping the S&P 500's longest losing streak (four straight days) since March. Supporting investors' sanguinity for the day, the National Federation of Independent Business' small business optimism index rose to 107.9, its second highest reading in history. Nonetheless, that rally was short-lived. Investors turned dour on Wednesday, August 15, as trade worries stayed front and center and a sharp decline in oil prices weighed on the energy sector after data showed U.S. stockpiles had risen the previous week to their highest levels since March 2017. However, investors received some encouraging news as well. Productivity and output showed strong gains for Q2, July retail sales rose 0.5% (beating expectations), and investors learned that Qatar purportedly promised to invest $15 billion in Turkey to assist in its currency crisis.

Exchange-Traded Equity Funds

For the fifth consecutive week, equity ETFs witnessed net inflows, taking in a little more than $281 million for the flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (-$462 million), adding money to the group for the fifth week in six. But, for the second week in three, non-domestic equity ETFs witnessed net inflows, this past week gaining $180 billion. iShares Core S&P 500 ETF (NYSEARCA:IVV) (+$1.5 billion), SPDR S&P 500 ETF (NYSEARCA:SPY) (+$1.1 billion), and iShares Core S&P MidCap ETF (NYSEARCA:IJH) (+$258 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, Financial Select Sector SPDR ETF (NYSEARCA:XLF) (-$694 million) experienced the largest individual net redemptions, and SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) (-$504 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the second week in three, taxable fixed income ETFs witnessed net outflows, however, this past week handing back just $237 million. APs were net purchasers of corporate high-yield ETFs (+$252 million) and flexible ETFs (+$86 million) but were net redeemers of corporate investment-grade debt ETFs (-$434 million) and government-Treasury ETFs (-$194 million). iShares Core US Aggregate Bond ETF (NYSEARCA:AGG) (+$181 million) and iShares 1-3 Year Treasury Bond (NASDAQ:SHY) ETF (+$132 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs, while iShares iBoxx $ Investment-Grade Corporate Bond ETF (NYSEARCA:LQD) (-$775 million) handed back the largest individual net redemptions for the week. For the second consecutive week, municipal bond ETFs witnessed net inflows, this past week taking in $64 million.

Conventional Equity Funds

For the eighth week running, conventional fund (ex-ETF) investors were net redeemers of equity funds, removing $920 million. Domestic equity funds, handing back a little less than $968 million, witnessed their thirteenth weekly net outflows while posting a 1.45% loss on average for the flows week. Their non-domestic equity fund counterparts, posting a 3.63% loss on average, witnessed their second consecutive week of net inflows (although only +$48 million). On the domestic equity side, fund investors shunned large-cap funds (-$652 million net) and equity income funds (-$216 million), while on the non-domestic equity side investors were net purchasers of global equity funds (+$276 million) but net redeemers of international equity funds (-$228 million).

Conventional Fixed Income Funds

For the second week running, taxable bond funds (ex-ETFs) witnessed net inflows, attracting $1.0 billion this past week. Fund investors padded the coffers of corporate investment-grade debt funds (+$1.9 billion) and government-Treasury funds (+$71 million) but were net redeemers of flexible funds (-$452 million) and balanced funds (-$301 million) for the week. For the second week in a row, municipal bond funds (ex-ETFs) witnessed net inflows, taking in $388 million while posting a 0.23% gain on average (their second weekly gain in three).