U.S. Weekly FundFlows Insight Report: Large-Cap/International Funds Suffer, Investors Embrace Small-Caps/Financials

Summary

• During Refinitiv Lipper’s fund-flows week ended September 28, 2021, investors were overall net purchasers of fund assets (including both conventional funds and ETFs) for the second straight week, adding $25.9 billion.
• Exchange-traded equity funds recorded $3.3 billion in weekly net outflows. This is the macro-group’s second straight week of outflows.
• Conventional equity funds (ex-ETFs) were net redeemers for the twenty-fifth time in 26 weeks (-$6.0 billion). Conventional equity funds posted a weekly return of negative 1.52% on average.

Vadzim Kushniarou/iStock via Getty Images

During Refinitiv Lipper’s fund-flows week ended September 28, 2021, investors were overall net purchasers of fund assets (including both conventional funds and ETFs) for the second straight week, adding $25.9 billion.

Equity funds (-$9.6 billion) suffered significant outflows for the second week in a row, while money market funds (+$33.9 billion), taxable bond funds (+$3.2 billion), and tax-exempt bond funds (+$408 million) all attracted new money during the fund-flows week.

Index Performance

At the close of Refinitiv Lipper’s fund-flows week, U.S. broad-based indices reported mixed results—the DJIA (+0.39%) and Russell 2000 (+0.30%) ended multiweek slides, while the S&P 500 (-0.82%) and NASDAQ (-2.58%) realized their fourth straight negative weekly performance. Overseas, the broad market indices each ended in the red—Shanghai Composite (-2.53%), Nikkei 225 (-2.35%), DAX 30 (-1.91%), and FTSE 100 (-1.27%).

Rates/Yields

During the fund-flows week, shorter-term Treasury yields continue to outpace their longer-dated counterparts. The two-year Treasury yield is up 23.75% over the week, while the 30-year yield is up 12.93%. Since the end of Q1 2021, the 10-two Treasury yield spread has fallen 21.69%. As of September 23, the U.S. 30-year fixed-rate mortgage average rose to 2.88% (+0.70% week over week). Both the United States Dollar Index (DXY, +0.94%) and the VIX (7.09%) increased from last Thursday.

Market Recap

On Thursday, September 23, all four broad-based U.S. indices registered significant plus-side performance on the day. The DJIA (+1.48%) and S&P 500 (+1.21%) realized their largest session gains in two months. The Russell 2000 (+1.82%) and NASDAQ (+1.04%) each logged respectable performance as well. Positive equity performance was paired with a selloff in Treasuries—yields across the curve rose by more than 4.00% on the day. While the markets posted good numbers, the overall economy had conflicting news from the IHS Markit Flash U.S. Composite PMI. The publication detailed the U.S. Composite Output Index and the U.S. Services Business Activity Index fell to 54.5 and 54.4. Even though both measures still signal expansion, supply chain disruptions, falling demand, and increasing costs led each index to fall to 12- and 14-month lows, respectively.

On Friday, September 24, the selloff of Treasuries continued as investors acted upon the Federal Reserve’s dot plot, resulting in yields rising all along the curve by no less than 3.00%. The Fed has pulled the rate hike forward in an effort to deal with persisting inflation, high economic growth, and increasing costs. Fed Chair Jerome Powell also hinted a tapering announcement could be coming our way around the Fed’s November meeting. Equity markets ended the week flat—S&P 500 (+0.15%), DJIA (+0.10%), NASDAQ (-0.03%), and Russell 2000 (-0.49%). Another concern from market players heading into the weekend is China’s Evergrande financial situation. Evergrande is the country’s second-largest real estate company and is more than $300 billion in debt. The company failed to make its most recent $83.5 million interest payment. Although Powell downplayed the situation saying, “The Evergrande situation seems very particular to China, which has very high debt for an emerging economy.” He added, “In terms of the implications for us, there’s not a lot of direct United States exposure.”

To start the new calendar week on Monday, U.S. market participants turned their eye to Washington and the debt ceiling limit. To avoid a government shutdown and possible U.S. government default, the Senate will need to support the already House-passed stopgap bill. Equity markets ended flat for the second straight day. The NASDAQ (-0.28%) and S&P 500 (-0.52%) both depreciated on the day as technology issues struggled with U.S. Treasury yields rising once again. The Russell 2000 (+1.46%) and DJIA (+0.21%) fared well thanks to the solid performance from small-caps and financials.

Tuesday, September 28, marked the largest daily decline from the NASDAQ (-2.83%) since March. The S&P 500 (-2.04%) suffered its largest daily fall since May. Treasury yields rising for the fifth straight day have caused a significant performance drag from the technology firms. The 10-year Treasury yield rose 3.50% to 1.54%, marking the highest mark since June. The Conference Board reported that the Consumer Confidence Index fell for the third straight month in September. The index, now at 109.3 (down from August’s 115.3 level), has reached a seven-month low. The VIX jumped 23.61% on the day.

Our fund-flows week wrapped up Wednesday, September 29, with markets and yields stabilizing from Tuesday’s chaos. U.S. equity markets were mixed—DJIA (+0.26%), S&P 500 (+0.16%), Russell 2000 (-0.20%), and NASDAQ (-0.24%)—while short-term Treasury yields fell more than 3.00%. The VIX dropped 2.97% from yesterday. Increasing prices, supply chain disruptions, hawkish Fed rhetoric, and initial jobless claims all while Congress attempts to avoid a government shutdown by Friday have significantly amplified market uncertainty.

Exchange-Traded Equity Funds

Exchange-traded equity funds recorded $3.3 billion in weekly net outflows. This is the macro-group’s second straight week of outflows. Equity ETFs have now posted four consecutive weeks of negative performance. The four-week moving average of inflows has hit its lowest level since October 2020.

Growth/value-large cap ETFs (-$8.0 billion) and sector-healthcare/biotech ETFs (-$609 million) suffered the largest weekly net outflows in the equity ETF macro-group. Growth/value large-cap ETFs recorded their second consecutive week of net outflows and their largest weekly outflows since February. Sector-healthcare/biotech ETFs have now recorded outflows in three of the past four weeks. Both subgroups realized negative performance over the fund-flows weeks (-1.14% and -3.57%, respectively).

Growth/value-small cap ETFs (+$2.6 billion) and sector-financial/banking ETFs (+$1.6 million) registered the largest inflows for the week. Growth/value-small cap ETFs logged their first weekly inflows in four weeks. Sector-financial/banking ETFs ended a three-week skid while returning a positive 3.47% on average. Both growth/value-small cap and sector-financial/banking ETFs reported their largest weekly inflows since March.

Over the past fund-flows week, the top three equity ETFs flow attractors were: iShares: Russell 2000 ETF (IWM, +$2.4 billion), ProShares: UltraPro QQQ (TQQQ, +$1.0 billion), and Select Sector: Financials SPDR (XLF, +$994 million).

Meanwhile, the bottom three equity ETFs in terms of weekly outflows were iShares: Core S&P 500 (IVV, -$5.8 billion), Invesco QQQ Trust 1 (QQQ, -$3.1 billion), and ProShares: S&P 500 Dividend Aristocrats (NOBL, -$767 million).

Exchange-Traded Fixed Income Funds

Exchange-traded fixed income funds recorded $1.8 billion in weekly net inflows—the macro-group’s tenth consecutive week of inflows. Fixed income ETFs reported a weekly return of negative 0.77% on average.

Corporate-investment grade ETFs (+$1.8 billion) and government-Treasury ETFs (+$280 million) had the largest weekly inflows under the fixed income ETF macro-group. Corporate-investment grade ETFs reported their eighth straight weekly inflows. Government-Treasury ETFs realized their fourth consecutive week of net inflows. Both subgroups realized negative performance over the fund-flows weeks (-0.79% and -1.06%, respectively).

International & Global Debt ETFs (-$523 million) and corporate-high quality ETFs (-$6 million) were the only subgroups to record weekly outflows of more than $1 million. International & Global Debt ETFs returned negative 1.51%, on average, over the week while suffering their largest outflows since March.

iShares: iBoxx $ Investment Grade Corporates (LQD, +$483 million) and iShares: Core US Aggerate Bond (AGG, +$364 million) attracted the largest amounts of weekly net new money for taxable fixed income ETFs.

On the other hand, iShares: 20+ Treasury Bond ETF (TLT, -$621 million) and iShares: JPM USD Emerging Markets Bond (EMB, -$495 million) suffered the largest net weekly outflows.

Conventional Equity Funds

Conventional equity funds (ex-ETFs) were net redeemers for the twenty-fifth time in 26 weeks (-$6.0 billion). Conventional equity funds posted a weekly return of negative 1.52% on average.

Domestic conventional equity funds saw outflows this week (-$5.0 billion), marking the thirteenth straight week of outflows. The subgroup has realized four consecutive weeks of negative performance. Nondomestic conventional equity funds also reported weekly outflows (-$1.1 billion), marking their first week of outflows in four and their largest since June.

Sector-energy funds (+$11 million) realized the only weekly inflows under the entire macro-group. The subgroup realized positive weekly performance (+2.12% on average) as they reported their third weekly inflows over the past four weeks.

Growth/value large-cap funds (-$4.0 billion) and international equity funds (-$835 million) saw the most money leave under conventional equity funds. Growth/value large-cap funds have seen outflows in 65 of their last 66 weeks. The subgroup depreciated 1.38%, on average, over the fund-flows week. International equity funds suffered negative performance (-2.49%) over the fund-flows week while logging their second straight week of net outflows.

Conventional Fixed Income Funds

Conventional fixed income funds realized a weekly inflow of $1.4 billion—their eighth straight week of inflows. The subgroup reported a weekly performance of negative 0.67%, on average.

Conventional corporate investment-grade funds (+$1.3 billion) led the macro-group in inflows as they observed their seventy-sixth consecutive week of inflows while posting seven straight weeks with inflows of more than $1.0 billion. Conventional flexible funds (+$278 million) followed, realizing their twenty-fourth straight week of inflows.

Government-mortgage funds (-$148 million) and international & global debt funds (-$89 million) suffered the largest outflows under conventional fixed income funds. Government-mortgage funds have gone back-to-back weeks seeing outflows as well as negative performance. International & global debt funds observed their first weekly outflow in six weeks.

Municipal bond funds (ex-ETFs) returned negative 0.66% on average over the fund-flows week. The subgroup attracted inflows ($+253 million) and posted their twenty-sixth straight week of net inflows. The subgroup has reported negative weekly performance in four consecutive weeks. Municipal bond funds have only recorded two total weeks of net redemptions this year.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.