Some fund classifications that have been under-loved and quasi out-of-favor since the pandemic began have gained in popularity as yields start to creep up and investors begin their rotation out of the popular “stay-at-home” and big-tech stocks. We are seeing investors put money back to work in financial, small-cap, value-oriented issues, and international offerings.

For the Lipper fund-flows week, investors were net purchasers of fund and ETF assets, injecting $3.6 billion into equity funds, $10.3 billion into taxable bond funds, and $2.4 billion into tax-exempt bond funds. Meanwhile, investors were net redeemers of money market funds (-$10.0 billion).

In particular, estimated weekly-net flows into emerging markets funds (+$2.5 billion), sector-financial/banking funds (+$2.0 billion this past week including ETFs), sector-technology funds (+$2.0 billion), Alternative Energy Funds (+$635 million), and Commodities Precious Metals Funds (+$650 million) show some early movement toward those groups that may benefit from an improving economy, increasing demand, rising interest rates, and possibly even contained inflationary pressures.

For the fund-flows week, the largest attractors of investor assets on the equity fund and ETF side were iShares MSCI EAFE Value ETF (EFV, +$2.4 billion), Financial Select Sector SPDR ETF (XLF, +$1.7 billion), iShares Core MSCI Emerging Markets ETF (IEMG, +$1.4 billion), and SPDR Dow Jones Industrial Average ETF (DIA, +$1.3 billion).

On the fixed income side, investors continued to favor the corporate investment-grade debt funds macro-group (+$8.2 billion), which attracted the lion’s share of net new money this week. However, in anticipation of a rising interest rate environment, Loan Participation Funds (+$1.4 billion, aka bank loan, leveraged loan, and senior loan funds) attracted their largest one-week net inflows since December 21, 2016, while Inflation Protected Bond Funds (including ETFs) took in $705 million this past week, their thirtieth week of net inflows in 31.

While Federal Reserve Board Chairman Jerome Powell said it was unlikely inflation would remain persistently high and the Fed was not planning on changing its monetary policy in the foreseeable future, we have seen the yield curve steepen a bit at the long-end, with the 10-year Treasury yield closing the Lipper fund-flows week ended Wednesday, January 20, 2021, at 1.12%, after starting the month out at 0.93%.

Last week we talked about the move of fixed income investors toward Inflation Protected Securities and Loan Participation Funds as they adjusted their portfolios to reflect the possible rise in interest rates. However, from a historical perspective, equities have done a better job of offsetting inflationary pressures in portfolios.

Overall, investors appear to be more confident that with a successful distribution of the COVID-19 vaccines, the economy will continue to rebound in spite—and maybe as a result—of a ballooning fiscal deficit as we move toward herd immunity. This should lead to the market experiencing slight inflationary pressures as a result of increasing demand, and could be beneficial and provide opportunity for a broader rally in the markets.