Despite Dovish Fed Comments, ETF, Conventional Fund Investors Were Net Redeemers

Investors were net sellers of fund assets (including those of conventional funds and ETFs) for the third week in four, withdrawing a net $17.6 billion for the LSEG Lipper fund-flows week ended Wednesday, October 11.

Fund investors were net purchasers of fixed-income funds (+$1.3 billion) while being net redeemers of money market funds (-$12.6 billion), equity funds (-$4.8 billion), commodity funds (-$770 million), mixed-assets funds (-$396 million), and alternatives funds (-$305 million) for the week.

The data sourced in this article were derived from LSEG Lipper Global Fund Flows, which differs slightly from the Lipper U.S. Fund Flow data due to timing and a change in methodology. This new application can be found on LSEG Workspace.

Market Wrap-Up

The prospect of an end to Federal Reserve rate hikes buoyed U.S. stocks and bonds during the most recent fund-flow week.

On the domestic equity side of the equation, the Nasdaq Composite (+3.20%) posted the largest gains of the often-followed broad-based U.S. indices, followed by the S&P 500 (+2.65%) and the Russell 2000 (+2.56%). The Dow (+2.04%) was the relative laggard of the group. Overseas, the Nikkei 225 (+4.48%) rose to the top of the leaderboard of the often-followed broad-based international indices, followed by the FTSE 100 (+4.46%) and the DAX Total Return Index (+3.66%). Meanwhile, the Shanghai Composite (-0.94%) posted the only market decline for the flow week.

The Bloomberg Municipal Bond Index (+1.11%) outpaced the Bloomberg U.S. Aggregate Bond Index (+1.00%) and the Morningstar LSTA U.S. Leveraged Loan Index (+0.24%) for the fund-flows week. With Fed officials making somewhat dovish comments about near-term rate hikes, the 10-year Treasury yield finished down for the week, declining 15 basis points (bps)—settling at 4.58%—while the United States 1-Month Treasury yield saw just a two bp rise from the prior week, closing out the flows week at 5.58%. The U.S. Treasury yield curve remained inverted, with the two- and 10-year Treasury yield spread (-41 bps) widening by nine bps during the week.

On Thursday, October 5, U.S. stocks finished mostly lower, continuing their multi-day decline as investors remained cautious ahead of Friday’s nonfarm payrolls report. Treasury yields slid for a second day after investors contemplated the implications of a slight rise in first-time jobless claims for the week prior, which came in at 207,000. While representing an increase, the number remains near pandemic lows.

U.S. stocks ended higher on Friday, October 6, after the Bureau of Labor Statistics reported the U.S economy created 336,000 jobs in September, easily beating analysts’ expectations of 170,000 new jobs. The redeeming factor in the report was the news that wage pressures appeared to ease, with average hourly wages rising a tepid 0.2% in September and the year-over-year rate declining to 4.2% from August’s 4.3% rate. The blockbuster headline numbers did cause some slight inflationary concerns in the markets, driving the 10-year Treasury yield up by six bps for the day to 4.78%.

Despite the weekend attack by Hamas on Israel, U.S. stocks ended higher on Monday, October 9, after investors digested more dovish comments by Fed officials. Remarks made by Dallas Federal Reserve Bank President Lorie Logan were interpreted as indicating the recent jump in long-term Treasury yields may mean the Fed may not have to continue its interest rate hiking campaign. In a speech, Logan said, if interest rates “remain elevated because of higher term premiums, there may be less need to raise the fed-funds rate.” The Treasury market was closed on Monday in observance of Columbus Day and Indigenous Peoples’ Day.

U.S. stocks posted their third day of gains on Tuesday, October 10, as Treasury yields declined and hopes rose that the Fed is approaching the end of its rate-hiking campaign as a spate of Fed speakers suggested further rate hikes may not be needed. Atlanta Fed President Raphael Bostic said he doesn’t think any more interest rate increases are needed. The 10-year Treasury yield declined 12 bps from its closing value on Friday to 4.66%. Fed-fund futures traders priced in an 86% chance that the Fed will leave its interest rate unchanged after its November meeting, according to the CME FedWatch Tool. Investors will be keeping a keen eye on the upcoming releases of PPI and CPI, the beginning of the Q3 earnings season—set to start on Friday—and further developments in the Middle East.

All three broad-based indices ended higher on Wednesday, October 11, after the Fed released its September policy-setting meeting minutes and the producer-price index showed wholesale prices rose more than expected. The Fed minutes showed officials were uncertain about the economy’s future path and want to move carefully. In other news, September wholesale prices rose 0.5%, pushed higher by rising energy costs. While PPI came down from August’s 0.7% increase, the rise beat analysts’ expectations of a 0.3% increase. Core PPI, which strips out the volatile food and energy sectors, rose 0.2%, matching expectations. The 10-year Treasury finished the day down eight bps at 4.58%.

Exchange-Traded Equity Funds

Equity ETFs witnessed net inflows for the second consecutive week, attracting a little less than $855 million for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$951 million), injecting money also for the second week in a row, while nondomestic equity ETFs witnessed net outflows for the fourth week in five, handing back $96 million this past week.

Developed international markets ETFs (+$1.1 billion) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by equity income ETFs (+$968 million) and multi-cap ETFs (+$912 million). Meanwhile, emerging markets equity ETFs (-$1.3 billion) suffered the largest net outflows, bettered by the small-cap ETFs (-$959 million) and mid-cap ETFs (-$317 million) macro-groups.

Exchange-Traded Alternatives, Commodities, and Mixed-Assets Funds

Alternative equity ETFs (+$19.5 million) witnessed the only net inflows of the other equity-based macro-classifications, followed by the mixed-assets ETFs (-$172 million) and commodity ETFs (-$666 million) macro-classifications for the week.

Invesco QQQ Trust Series 1 (NASDAQ:QQQ) (QQQ, +$2.8 billion) and iShares Core S&P 500 ETF (NYSE:IVV) (IVV, +$2.6 billion) attracted the largest amounts of net new money of all individual equity and equity-based ETFs. At the other end of the spectrum, SPDR S&P 500 ETF Trust (ASX:SPY) (SPY, -$5.7 billion) experienced the largest individual net redemptions and iShares Russell 2000 ETF (NYSE:IWM) (IWM, -$1.1 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the first week in three, taxable fixed-income ETFs experienced net inflows, taking in $4.8 billion this week. APs were net purchasers of short/intermediate government & treasury ETFs (+$4.0 billion), short/intermediate investment-grade debt ETFs (+$2.6 billion), and government & Treasury fixed income ETFs (+$734 million) while being net redeemers of high yield ETFs (-$2.2 billion) and emerging markets debt ETFs (-$993 million).

SPDR® Bloomberg 1-3 Month T-Bill ETF (NYSE:BIL) (BIL, +$1.9 million), iShares Short Treasury Bond ETF (NASDAQ:SHV) (SHV +$1.3 billion), and PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (NYSE:MINT) (MINT, +$859 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, SPDR® Bloomberg High Yield Bond ETF (NYSE:JNK) (JNK, -$943 million) and iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ:EMB) (EMB, -$885 million) handed back the largest individual net redemptions for the week.

For the fifth consecutive week, municipal bond ETFs witnessed net inflows, taking in $518 million this week. iShares National Muni Bond ETF (NYSE:MUB) (MUB, +$387 million) witnessed the largest draw of net new money of the municipal bond ETFs, while SPDR® Nuveen Bloomberg Municipal Bond ETF (NYSE:TFI) (TFI, -$70 million) experienced the largest net redemptions in the subgroup.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net sellers of equity funds for the eighty-seventh week in a row—redeeming $5.7 billion—with the macro-group posting a 2.89% market gain for the fund-flows week. Domestic equity funds—suffering net redemptions of slightly more than $4.3 billion—witnessed their eighty-eighth consecutive week of net outflows while posting a 2.76% market rise on average for the fund-flows week. Non-domestic equity funds—posting a 3.13% weekly market gain on average—observed their thirty-first week of net outflows in a row, handing back slightly more than $1.3 billion this week.

On the domestic equity side, fund investors were net redeemers of multi-cap funds (-$1.1 billion), large-cap funds (-$834 million), and small-cap funds (-$742 million). Investors on the nondomestic equity side were net sellers of developed markets international funds (-$676 million) and developed global markets funds (-$241 million) for the week.

Conventional Alternatives, Commodities, and Mixed-Assets Funds

Commodities funds (-$104 million) witnessed the smallest net outflows of the other equity-based macro-classifications, followed by the mixed-assets funds (-$224 million) and alternative equity funds (-$325 million) macro-classifications for the week.

Conventional Fixed Income Funds

For the fifth consecutive week, taxable bond funds (ex-ETFs) witnessed net outflows, handing back $2.7 billion this past week—while posting a 0.76% market return on average for the fund-flows week. The emerging markets debt funds macro-group witnessed the smallest outflows for the week—handing back $58 million, followed by short/intermediate Government and treasury funds (-$77 million) and world income funds (-$87 million). Short/intermediate investment-grade debt funds (-$1.4 billion) suffered the largest net redemptions, bettered by general domestic taxable fixed-income funds (-$298 million) and high-yield funds (-$290 million).

The municipal bond funds group posted a 1.03% market gain on average during the fund-flows week (their first weekly market rise in five) but suffered net outflows for the tenth consecutive week, handing back $1.3 billion this week. None of the classifications in this group witnessed net inflows. New Jersey Municipal Debt Funds and Ohio Municipal Debt Funds both witnessed the smallest net outflows, handing back some $600,000 for the week. The General and Insured Municipal Debt Funds classification witnessed the largest net outflows of the group, handing back $295 million, bettered by Intermediate Municipal Debt Funds (-$272 million).