U.S. Weekly FundFlows Insight Report: Anticipated Tapering Results In Record Inflows For Government-Mortgage Funds

During Refinitiv Lipper’s fund-flows week ended November 3, 2021, investors were overall net purchasers of fund assets (including both conventional funds and ETFs) for the third week in a row, adding $991 million.

Money market funds (-$5.0 billion) suffered significant outflows for the fourth week in five, while taxable bond funds (+$3.2 billion), equity funds (+$2.1 billion), and tax-exempt bond funds (+$603 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 all reported positive results for the second week in three. The small-cap-focused Russell 2000 (+6.74%) was the top weekly performer—the NASDAQ (+3.78%), S&P 500 (+2.39%), and DJIA (+1.88%) followed. This week marks the largest weekly return for the Russell 2000 and NASDAQ in the past 51 and 52 weeks, respectively. Overseas, the broad market indices traded mixed—the DAX 30 (+1.52%) and Nikkei 225 (+1.14%) ended the week in the black, while FTSE 100 (-0.45%) and Shanghai Composite (-1.88%) depreciated.

Rates/Yields

The two- and three-year Treasury yields fell 2.65% and 0.92%, respectively, while the 10-year Treasury yield rose 3.27% over the week. Despite this week’s fall in short-term yields, the yield curve has continued to flatten, with the 10-two Treasury yield spread falling 25.25% since the end of Q1 2021. Year to date, the two-year yield has risen 308.55% whereas the 10-year yield has only jumped 72.22%. As of October 28, the U.S. 30-year fixed-rate mortgage average rose to 3.14% (+1.62% week over week), marking the first time since April the 30-year fixed rate increased three consecutive weeks. The United States Dollar Index (DXY, +0.07%) remained relatively flat while the VIX (-12.85%) decreased from last Thursday.

Market Recap

On Thursday, October 28, the Bureau of Economic Analysis released its Q3 2021 Gross Domestic Product (GDP) Report. The report showed real GDP increased at an annual rate of 2.0% during Q3, marking the slowest rate of expansion in more than a year. The 2.0% GDP increase follows an increase of 6.7% in the second quarter and fell short of Q3 estimates of positive 2.6%. The publication suggests the deceleration was due to a decrease in consumer spending, a resurgence in COVID-19 cases, and supply chain disruptions. The Department of Labor reported the seasonally adjusted initial unemployment claims for the prior week to be 269,000—the lowest level for initial claims since March 14, 2020. For reference, this figure one year ago was 765,000. The VIX (-2.71%) fell on the day, as U.S. equity markets reported strong returns—Russell 2000 (+2.02%), NASDAQ (+1.39%), S&P 500 (+0.98%), and DJIA (+0.68%).

Friday, October 29, was headlined by the U.S. Department of Commerce’s Personal Income and Outlays September report which showed month-over-month core personal consumption expenditures index (core-PCE) increased 0.2% in September. Core-PCE increased 3.6% over the past 12 months, matching the year-over-year increases reported in each of the previous three months. The report also noted both personal income (-1.0%) and disposable personal income (-1.3%) decreased in September, following increases in August. The drops in both income figures could be attributed to a falling unemployment rate and government benefits as more and more individuals rejoin the workforce. The VIX (-1.15%) fell once again while the NASDAQ (+0.33%), DJIA (+0.25%), and S&P 500 (+0.19%) all ended the daily session on new record highs. The Russell 2000 (-0.03%) retreated slightly for the day.

Monday, November 1, began a new calendar month as U.S. equity markets continued their momentum from the end of last week. The Russell 2000 (+2.65%) outperformed all other indices as the index recorded its largest daily gain since the end of August. The ISM Manufacturing Purchasing Managers’ Index (PMI) published on Monday fell from September. While October’s 60.8 recording still indicates expansion, increased commodity and input prices paired with labor shortages are leaving the market much less optimistic about future growth. The two- and three-year Treasury yield rose 4.04% and 3.37% on the day ahead of the Federal Open Market Committee’s (FOMC) meeting.

Tuesday, November 2, saw domestic equity markets trade slightly up—DJIA (+0.39%) was the outperformer on the day. An unanticipated speedbump was hit on Capital Hill, the estimated $1.9 trillion spending bill which was expected to pass soon, was met with criticism from Senator Joe Manchin. Sen. Manchin is hoping for greater insight as to the impact this bill will have on the country’s balance sheet and economy. He stated, “I’m open to supporting a final bill that helps move our country forward, but I’m equally open to voting against a bill that hurts our country.” The hold-up puts President Joe Biden’s economic agenda in jeopardy as no new infrastructure spending will advance without first resolving questions on social spending. A selloff in the Treasury market saw the two-year (-11.46%), three-year (-7.79%), five-year (-3.93%), and seven-year (-2.95%) rates all fall on the day.

Our fund-flows week wrapped up Wednesday, November 3, which was a massive news day for market participants. The Federal Reserve announced it would begin tapering the pace of quantitative easing later this month. The Fed’s statement read:

“In light of the substantial further progress the economy has made toward the Committee’s goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities.”

Quantitative easing from the Fed began in June 2020, which was designed to support the economy during the pandemic. During this period, the central bank has been buying $80 billion in Treasury bonds and $40 billion in mortgage-backed securities. The asset-buying program has artificially kept both Treasury yields and mortgage rates down. The conclusion of this program was widely anticipated and was broadly accepted as the initial step on the road to interest rate hikes. The Fed, however, did not release an updated timeline regarding future interest rate hikes propelling equity markets higher once again—Russell 2000 (+1.80%), NASDAQ (+1.04%), S&P 500 (+0.65%), and DJIA (+0.29%).

Exchange-Traded Equity Funds

Exchange-traded equity funds recorded $8.0 billion in weekly net inflows. This is the macro group’s fifth straight week of inflows. Equity ETFs have now had three weeks of positive performance over the last four.

Growth/value large-cap ETFs (+$3.1 billion), international equity ETFs (+$1.1 billion) , sector-healthcare/biotech ETFs (+$1.0 billion), and sector-technology ETFs (+$1.0 billion) all attracted the weekly net inflows more than $1 billion. Growth/value large-cap ETFs recorded their fifth straight week of both net inflows and positive performance. Sector-healthcare/biotech ETFs reported their largest weekly inflow since July. Sector-technology ETFs observed their third straight weekly inflow, while international equity ETFs have now realized 19 consecutive weeks of net inflows.

Sector-other ETFs (-$742 million) and sector-utilities ETFs (-$58 million) were the only subgroups to suffer outflows over the week. Despite five consecutive weeks of plus-side performance, sector-other ETFs saw their first week of outflows in three. Sector-utilities ETFs have suffered outflows in three straight weeks.

Over the past fund-flows week, the top three equity ETF flow attractors were: SPDR S&P 500 ETF (SPY, +$2.2 billion), iShares: Core S&P 500 (IVV, +$1.4 billion), and Select Sector: Healthcare Sector SPDR (XLV, +$649 million).

Meanwhile, the bottom three equity ETFs in terms of weekly outflows were: ProShares: UltraPro QQQ (TQQQ, -$1.1 billion), iShares: Russel 1000 ETF (IWB, -$785 million), JPMorgan BetaBuilders Japan (BBJP, -$771 million).

Exchange-Traded Fixed Income Funds

Exchange-traded fixed income funds recorded $697 million in weekly net inflows—the macro-group’s fourth straight week of inflows. Fixed-income ETFs reported a weekly return of negative 0.28% on average—the macro-group’s sixth week of negative performance in the last seven.

Government-Treasury ETFs (+$1.1 billion) and flexible funds ETFs (+$403 million) had the largest weekly inflows under the fixed income ETF macro-group. Government-Treasury ETFs posted their third weekly inflow in four weeks even though they returned a negative 0.59%. Flexible funds ETFs have now four consecutive weeks of net inflows, despite the subgroup suffering three straight weeks of negative performance.

Corporate-high yield ETFs (-$1.1 billion) and corporate-investment grade ETFs (-$293 million) were the only subgroups to record weekly outflows greater than $1 million. Corporate-high yield ETFs have witnessed their first week of outflows in three and their largest outflow since August. Corporate-investment grade ETFs have now logged back-to-back weekly outflows for the first time in 11 weeks. Both subgroups recorded negative weekly performance on average (-0.01% and -0.19%, respectively).

iShares: 7-10 Treasury Bond ETF (IEF, +$779 million), iShares: Core US Aggregate Bond ETF (AGG, +$635 million), and iShares: Core TIPS Bond ETF (TIP, +$531 million) attracted the largest amounts of weekly net new money for taxable fixed income ETFs.

On the other hand, iShares: iBoxx $Investment Grade Corporates ETF (LQD, -$1.3 billion) and iShares: iBoxx $High Yield Corporates ETF (HYG, -$1.2 million) suffered the largest net weekly outflows.

Conventional Equity Funds

Conventional equity funds (ex-ETFs) were net redeemers for the eighteenth time in 19 weeks (-$5.9 billion). Conventional equity funds posted a weekly return of positive 2.27% on average, marking their third week of positive performance in four.

Domestic conventional equity funds saw outflows this week (-$5.7 billion), marking the ninetieth straight week of outflows. Nondomestic conventional equity funds reported a weekly outflow of $146 million, marking their second consecutive week of net outflows.

International equity funds (+$88 million) and sector-real estate funds (+$34 million) were the only subgroups to witness weekly inflows of more than $30 million under this macro-group. Both subgroups recorded positive weekly performance of 1.03%, and 1.77%, respectively. Sector-real estate conventional funds have now reported four straight weeks of inflows.

Growth/value large-cap funds (-$4.4 billion) and growth/value small-cap funds (-$613 million) saw the most money exit conventional equity funds. Growth/value large-cap funds have seen outflows in 70 of their last 71 weeks. The subgroup recorded a positive 2.34% on average over the fund-flows week while suffering their largest weekly outflow since June. Growth/value small-cap funds logged their twentieth straight week of net outflows despite the strong Russell 2000 performance this week. The subgroup realized their largest weekly performance (+5.36%) in a year.

Conventional Fixed Income Funds

Conventional fixed income funds realized a weekly inflow of $2.6 billion—their fourth straight week of inflows. The subgroup reported a weekly performance of positive 0.23% on average.

Conventional government mortgage funds (+$1.3 billion) and corporate-investment grade funds (+$722 million) led the macro-group in inflows. Government-mortgage funds celebrated their largest weekly inflow to date despite posting a negative weekly performance (-0.05%, on average). Corporate-investment grade funds observed their seventy-ninth week of inflows over the last 81 weeks.

Conventional corporate-high quality funds (-$386 million) and corporate-high yield funds (-$170 million) suffered the largest outflows under conventional fixed-income funds. Corporate-high quality funds posted a negative 0.32% over the week as they notched their sixth straight week of outflows.

Municipal bond funds (ex-ETFs) returned positive 0.41% on average over the fund-flows week. The subgroup witnessed $83 million in net inflows as they posted their second straight week of inflows. Conventional municipal bond funds have only recorded four total weeks of net outflows this year.

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