Passively Managed Responsible Investing Mutual Funds And ETFs Outdraw Active Counterparts In Q2

U.S. investors pushed equity funds to their fifth consecutive quarter of plus-side performance in Q2 2021 as they focused on the reopening of global economies, a commitment by the Federal Reserve Board to keep its easy-money policy intact, and a goldilocks U.S. nonfarm payrolls report for May. For Q2 2021, the average equity fund and taxable fixed-income fund posted a 6.36% and 1.55% return, respectively.

However, flows into mutual funds and ETFs continued to favor fixed-income funds as investors evaluated the loftiness of equity prices and the global spread of the delta variance of the coronavirus while remaining concerned about inflation. Nonetheless, in a quasi-flight to safety and continued search for yield, bond investors pushed the 10-year Treasury yield down 29 basis points (bps) for Q2 to 1.45%.

Long-term funds (equity and fixed-income funds and ETFs, excluding money market funds) attracted some $318.7 billion for Q2. However, like in prior quarters, investors gravitated toward fixed-income instruments, injecting $184.4 billion into taxable and tax-exempt fixed-income funds, while their equity and mixed-assets fund cousins attracted $134.3 billion for the quarter.

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Over the last few years, passively managed equity funds and ETFs outdrew their actively managed counterparts, while investors appeared to prefer actively managed fixed income products over passive.

However, for Q2, passively managed taxable fixed income funds (+$82.9 billion) outdrew actively managed taxable fixed income funds (+$72.4 billion) for the first time in recent memory. That said, actively managed municipal debt funds (+$23.9 billion for Q2) still outdrew their passively managed counterparts (+$5.2 billion).

Taking another slice of the data shown above and focusing on socially responsible investing (SRI) funds and the more recent emphasis on environmental, social, and governance (ESG) focused investment/screening practices, we saw similar passive versus active fund-flows trends for the quarter, while in contrast, actively managed taxable fixed income SRI/ESG funds still outdrew their passively managed cohorts for the quarter ended June 30, 2021.

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