Funds (including both mutual funds and ETFs) have taken in more than $260 billion in net new money during the first two quarters of 2019. As the chart below illustrates, all of the fund asset groups except equity funds have experienced positive net flows in both quarters. Taxable bond funds have led the way with total net inflows of $140.7 billion for the year to date, followed by money market funds (+$126.6 billion) and municipal debt funds (+$44.2 billion). Equity funds have seen $49.1 billion leave their coffers this year, with the lion’s share (-$46.5 billion) coming in Q2. The fund flow results for the first half of 2019 mark a reversal in trend and investor sentiment from 2018. Funds did have overall net positive flows of $178.2 billion last year, but the only asset group on the plus side of the ledger was money market funds (+$187.2 billion), as taxable bond funds (-$4.4 billion), equity funds (-$3.0 billion), and muni debt funds (-$1.6 billion) all saw money leave.
Taxable bond funds have benefited greatly this year from the Federal Reserve Board’s change of view on interest rates. The Fed has done a complete 180 in respect to interest rates over the last six months, as it has gone from forecasting two interest rate hikes in 2019 to looking like it will actually reduce rates at its next policy meeting in July. The Core Bond Funds peer group has the largest individual net inflow (+$49.9 billion) for the year to date for the asset group.
In addition to the Fed’s change in its views on interest rates, a change in tax laws has contributed to investor demand for muni debt funds. The U.S. Tax Cuts and Jobs Act put a cap on how much state and local taxes an individual can deduct from their federal taxes. This has caused investors to turn to muni bond funds in search of tax-exempt interest income to compensate for their higher federal taxes. The year-to-date positive net flows of $44.2 billion puts the asset group on pace to better its current best annual net inflow ever of $81.1 billion in 2009. The national muni peer groups (+$37.3 billion) are responsible for the majority of this year’s net inflows.
Equity funds took a turn for the worse in Q2 after basically holding steady in Q1. The second quarter net outflows were evenly distributed between domestic (-$23.4 billion) and non-domestic (-$23.2 billion) equity funds. The largest net negative flows from the individual peer groups for the quarter belonged to Multi-Cap Value Funds (-$13.4 billion), Large-Cap Value Funds (-$6.6 billion), and Financial Services Funds (-$6.5 billion).
Asset Groups (including both mutual funds and ETFs), Quarterly Net Flows ($Bil), Q2 2019 vs. Q1 2019
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