ETF And Conventional Fund Investors Became More Risk Averse During The Fund Flows Week

Fund investors generally took risk off their portfolios for the Refinitiv Lipper fund flows week ended March 8, 2023, as they awaited the release of February’s nonfarm payrolls report due out at the end of the week and began dissecting news coming from Federal Reserve Board Chair Jerome Powell’s semi-annual testimony before Congress, a report of better-than-expected first-time jobless claims, and rising Treasury rates. The two-year Treasury yield closed above the 5% mark for the first time since June 18, 2007, on Tuesday, and the two- and 10-year Treasury yield spread widened to negative 103 bps - the deepest inversion since October 2, 1981 (according to Dow Jones Market Data).

In addition, by the end of the flows week, investors were already confronted with nascent liquidity concerns for Silicon Valley Bank (SIVB) on Wednesday after SVB announced that it had taken extraordinary measures to shore up its balance sheets. The bank sold $21 billion of its most liquid investments, borrowed $15 billion, and organized an emergency sale of its stock to raise cash. We now know these measures were not successful and ended with the bank being shut down by California regulators and in receivership under the Federal Deposit Insurance Corporation (FDIC).

For the fund flows week, investors were net purchasers of fund assets (including those of conventional funds and ETFs) for the second week in a row, but they injected only a net $853 million for the flows week. Fund investors were net purchasers of taxable bond funds (+$3.9 billion) while being net redeemers of money market funds (-$2.0 billion), equity funds (-$735 million), and tax-exempt fixed income funds (-$308 million).

For the week, the primary attractor of investors’ assets in the taxable bond fund and ETF space was the government-Treasury funds macro-group, which took in a net $3.2 billion, followed by the corporate investment-grade debt funds (+$717 million) macro-group. From a classification perspective, Short U.S. Treasury Funds (+$2.4 billion) were the primary draw of net new money, followed by Core Bond Funds (+$1.1 billion), Core-Plus Bond Funds (+$760 million), and General U.S. Treasury Funds (+$576 million).

Not surprising, given the timing of the announcements, we saw most of the defensive moves realized in ETF offerings over the more long-term focus of conventional mutual funds. For the fund flows week, conventional taxable bond funds witnessed $1.0 billion in net redemptions, while their ETF counterparts attracted $4.9 billion. On the conventional fund side, the government mortgage funds macro-group attracted the largest sum of net new money, taking in $214 million, followed by government-Treasury & mortgage funds (+$131 million). Meanwhile, balanced funds (-$410 million) and flexible funds (-$294 million) witnessed the largest net redemptions.

On the ETF side of the ledger, only government-mortgage ETFs (-$12 million) witnessed net redemptions, while government-Treasury ETFs (+$3.3 billion) attracted the largest net inflows, followed by corporate investment-grade debt funds (+$944 million) and international & global debt ETFs (+$175 million). This is a continuation of a trend we have reported on over the last two-plus months. For the year-to-date period ended March 8, 2023, government Treasury ETFs have attracted the largest sum of net new money, taking in $12.9 billion, followed closely by corporate investment-grade debt ETFs (+$11.3 billion) and a bit further out by international & global debt funds (+$3.0 billion).

Focusing on the ETF movers during the fund flows week, SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL, +$723 million), iShares 20+ Year Treasury Bond ETF (TLT, +$509 million), and iShares 7-10 Year Treasury Bond ETF (IEF, +$494 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, Schwab Intermediate-Term U.S. Treasury ETF (SCHR, -$469 million) and SPDR Bloomberg Barclays High Yield Bond ETF (JNK, -$254 million) handed back the largest individual net redemptions.

ETF investors were selectively a bit more aggressive on the equity side of the business than were their conventional fund cohorts, with equity ETFs attracting a net $3.2 billion for the fund flows week, while conventional equity fund investors redeemed a net $3.9 billion. The large-cap conventional funds (-$2.9 billion) macro-group witnessed the largest net redemptions, bettered by global equity funds (-$444 million) and mid-cap funds (-$366 million). The conventional international equity funds macro-group took in the largest amount of net new money for the week.

Large-cap ETFs (+$1.3 billion) took in the largest amount of net new money for the week, followed by small-cap ETFs (+$1.0 billion), international ETFs (+$590 million), sector-energy ETFs (+$528 million), and equity income ETFs (+$498 million), while ETF investors turned their backs on global equity ETFs (-$595 million), sector-healthcare/biotechnology ETFs (-$559 million), and sector-real estate ETFs (-$263 million). The year-to-date trend is not quite as consistent as we saw in the taxable fixed income space, but is present to some extent nonetheless, with international equity ETFs (+$29.2 billion) taking in the largest sum so far this year, small-cap ETFs (+$4.7 billion), and equity income ETFs (+$4.30 billion) attracting the next two largest draws of net new money. For the YTD period, large-cap ETFs (-$11.8 billion) continued to be the pariah for the group.

Drilling down into the individual equity ETF leaders and laggards this week, Invesco QQQ Trust 1 (QQQ, +$1.1 billion) and iShares Core S&P MidCap ETF (IJH, +$555 million) attracted the largest amounts of net new money in the equity ETFs space. At the other end of the spectrum, iShares MSCI ACWI ETF (ACWI, -$569 million) experienced the largest individual net redemptions and Health Care Select Sector SPDR ETF (XLV, -$556 million) suffered the second largest net redemptions of the week.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.