Year-End Rotation Into Out-Of-Favor Issues?

Despite a horrible first quarter in 2020, when the average equity and fixed income fund (including ETFs) lost 22.33% and 4.56%, respectively, both asset classes were able to finish the year on strong footing, posting one-year returns of 15.63% and 5.28%, respectively.

Even the average mixed-asset (target date and target risk) fund managed to put together a handsome 12.26% one-year return. Not bad, considering the ground that needed to be retraced before the funds could move into positive territory.

However, there is still a ton of cash sitting on the sidelines, waiting for the other proverbial shoe to drop. By Dec. 31, 2020, estimated net flows into U.S. domiciled money market funds had reached $653.9 billion (based on preliminary year-end numbers), down from the $1.120 trillion pinnacle reached in May.

Conventional fund investors appeared to shrug off the strong rebound in equities, redeeming a net $532.6 billion during 2020, with conventional large-cap funds (-$295.1 billion) suffering the largest exodus (in spite of the average large-cap fund returning 21.78% for the year), bettered by international income funds (-$119.6 billion) and small-cap funds (-$32.3 billion).

Conventional fixed income funds continued to attract net new money during 2020, with taxable bond funds taking in $105.6 billion and tax-exempt bond funds attracting some $26.9 billion.

However, exchange-traded funds continued to be the go-to instrument for all the asset classes. For 2020, equity ETFs took in $196.7 billion, while their taxable and tax-exempt fixed income counterparts attracted $178.7 billion (their largest one-year net inflow going back to 2002, when the first fixed income ETF began trading) and $12.0 billion, respectively.

As reported in the mainstream media over the last half of the year, much of the rally in equities was attributed to large tech and “stay-at-home” stocks. But since the creation and recent distribution of a COVID-19 vaccine and reopening of the global economies (albeit in fits and starts), a rotation out of the high-flying tech issues and into more out-of-favor stocks has begun.

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