Hawkish Fed Comments Pushed ETF and Conventional Fund Investors to the Sidelines

Investors were net sellers of fund assets (including those of conventional funds and ETFs) for the first week in four, withdrawing a net $16.8 billion for the LSEG Lipper fund-flows week ended Wednesday, September 20.

Fund investors were net purchasers of fixed income funds (+$1.2 billion) while being net redeemers of money market funds (-$9.7 billion), equity funds (-$7.2 billion), alternatives funds (-$472 million), commodity funds (-$311 million), and mixed-assets funds (-$292 million) for the week.

The data sourced in this article were derived from Lipper’s Global Fund Flows application which differs slightly from the Lipper U.S. Fund Flow data due to timing and methodology. This new application can be found on LSEG Workspace and will be the sole source of weekly fund flows going forward once the Lipper U.S. Fund Flows application is decommissioned on September 30, 2023.

Market Wrap-Up

Inflation worries, rising oil prices, and an increase in Treasury yields during the week pressured U.S. stocks and bonds.

On the domestic equity side of the equation, the Dow (-0.39%) did the best job of mitigating losses of the broad-based U.S. indices, followed by the S&P 500 (-1.46%) and the Russell 2000 (-1.67%). The Nasdaq Composite (-2.49%) was the laggard of the group. Overseas, the FTSE 100 (+1.97%) rose to the top of the leaderboard of the often-followed broad-based international indices, followed by the Nikkei 225 (+0.84%) and the Xetra DAX Total Return Index (+0.64%). Meanwhile, the Shanghai Composite (-0.71%) posted the only market decline for the flows week.

The Morningstar LSTA U.S. Leveraged Loan Index (+0.33%) outpaced the Bloomberg Municipal Bond Index (-0.28%) and the Bloomberg U.S. Aggregate Bond Index (-0.60%) for the fund-flows week. With the recent rise in oil prices and the hawkish tone set by the Federal Reserve Board on Wednesday after the FOMC meeting, the 10-year Treasury yield finished up for the week, rising 10 basis points (bps)—settling at 4.35%—while the 1-Month Treasury yield saw no change from the prior week, closing out the flows week at 5.53%. The U.S. Treasury yield curve remained inverted, with the two- and 10-year Treasury yield spread (-77 bps) widening by six bps during the week.

On Thursday, September 14, U.S. stocks finished mostly higher, with the Dow rising almost 332 points on the day as investors digested a 0.6% rise in retail sales in August and an interest rate hike by the European Central Bank. However, investors kept a keen focus on wholesale prices after the producer-price index witnessed its largest increase in 14 months, climbing 0.7% in August and beating analyst expectations of a 0.4% rise. The year-over-year rise in core PPI, which excludes volatile food and energy, edged up to 3.0% from 2.9%. Despite inflationary concerns, fed funds futures traders continued to price in a 97% probability that the Federal Reserve would hold its key lending rate steady at its upcoming policy-setting committee meeting next week, according to CME FedWatch Tool.

U.S. stocks ended down on Friday, September 15, as investors began to worry about inflationary pressures ahead of the FOMC meeting. According to the Fed, August industrial production rose 0.4%, beating analysts’ estimates of a 0.2% gain. Adding to the angst, the New York Fed released data from its Empire State manufacturing survey, which showed the business conditions index rose 21 points in September to 1.9 after being in negative territory. Investors were also weighing the possible impacts of a strike by the United Auto Workers against Ford (NYSE:F), General Motors (NYSE:GM), and Chrysler owner Stellantis (NYSE:STLA).

The U.S. market just managed to eke out some minor gains on Monday, September 18, ahead of the FOMC meeting, after seeing US crude oil futures settle at $91.48/bbl., its highest closing value since at least November. The prior week’s better-than-expected economic data, accompanied by the continued rise in oil raised concerns about interest rates staying higher for a longer period than was expected as the Fed attempts to get inflation down to its target of 2.0%.

The Dow ended down 107 points on Tuesday, September 19, as investors awaited interest rate policy announcements this week from the Federal Reserve (Wednesday), the Bank of England (Thursday), and the Bank of Japan (Friday). In other news, U.S. housing starts fell 11.3% in August to 1.28 million, its lowest value since June 2020.

All three broad-based indices ended lower on Wednesday, September 20, after the Fed—as was expected—left its key lending rate unchanged but signaled another interest rate hike this year is possible. Federal Reserve Chair Jerome Powell indicated that the majority of Fed officials expected one more 25-bp interest rate hike before year-end.

Exchange-Traded Equity Funds

Equity ETFs witnessed net outflows for the second week in three, handing back a little less than $1.8 billion for the most recent fund-flow week. Authorized participants (APs) were net sellers of domestic equity ETFs (-$1.7 billion), withdrawing money also for the second week in three, while nondomestic equity ETFs witnessed net outflows for the second week in a row, handing back $82 million this past week.

Equity income ETFs (+$642 million) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by multi-cap ETFs (+$247 million) and mid-cap ETFs (+$88 million). Meanwhile, domestic sector equity ETFs (-$2.1 billion) suffered the largest net outflows, bettered by the large-cap ETFs (-$564 million) and emerging markets equity ETFs (-$167 million) macro-groups.

Exchange-Traded Alternatives, Commodities, and Mixed-Assets Funds

Mixed-assets ETFs (-$9 million) witnessed the smallest net outflows of the other equity-based macro-classifications, followed by the alternative equity ETFs (-$162 million) and commodity ETFs (-$266 million) macro-classifications for the week.

Direxion Daily Semiconductor Bull 3X Shares (NYSE:SOXL) (SOXL, +$443 million) and iShares Core S&P 500 ETF (NYSE:IVV) (IVV, +$362 million) attracted the largest amounts of net new money of all individual equity and equity-based ETFs. At the other end of the spectrum, Invesco QQQ Trust Series 1 (NASDAQ:QQQ) (QQQ, -$1.5 billion) experienced the largest individual net redemptions and Financial Select Sector SPDR® Fund (NYSE:XLF) (XLF, -$1.2 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the second week in a row, taxable fixed-income ETFs experienced net inflows, taking in $2.7 billion this week. APs were net purchasers of general domestic taxable fixed income ETFs (+$1.5 billion), government & Treasury fixed income ETFs (+$636 million), and short/intermediate government & Treasury ETFs (+$604 million) while being net redeemers of high yield ETFs (-$466 million) and alternative bond ETFs (-$58 million).

iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD) (LQD, +$687 million), iShares® 0-3 Month Treasury Bond ETF (NYSE:SGOV) (SGOV +$437 million), and Invesco Senior Loan ETF (NYSE:BKLN) (BKLN, +$357 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG) (HYG, -$306 million) and SPDR® Bloomberg High Yield Bond ETF (NYSE:JNK) (JNK, -$200 million) handed back the largest individual net redemptions for the week.

For the second consecutive week, municipal bond ETFs witnessed net inflows, taking in $526 million this week. iShares National Muni Bond ETF (NYSE:MUB) (MUB, +$460 million) witnessed the largest draw of net new money of the municipal bond ETFs, while iShares Short-Term National Muni Bond ETF (NYSE:SUB) (SUB, -$47 million) experienced the largest net redemptions in the subgroup.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net sellers of equity funds for the eighty-fourth week in a row—redeeming $5.4 billion—with the macro-group posting a 0.88% market loss for the fund-flows week. Domestic equity funds—suffering net redemptions of slightly less than $4.5 billion—witnessed their eight-fifth consecutive week of net outflows while posting a 1.14% market decline on average for the fund-flows week. Non-domestic equity funds—posting a 0.37% weekly market drop on average—observed their twenty-eighth week of net outflows in a row, handing back slightly more than $892 million this week.

On the domestic equity side, fund investors were net redeemers of large-cap funds (-$2.0 billion), mid-cap funds (-$895 million), and multi-cap funds (-$780 million). Investors on the nondomestic equity side were net purchasers of developed global markets funds (+$27 million) but were net redeemers of emerging markets equity funds (-$98 million) and world sector equity funds (-$101 million) for the week.

Conventional Alternatives, Commodities, and Mixed-Assets Funds

Commodities funds (-$45 million) witnessed the smallest net outflows of the other equity-based macro-classifications, followed by the mixed-assets funds (-$283 million) and alternative equity funds (-$310 million) macro-classifications for the week.

Conventional Fixed Income Funds

For the seventh consecutive week, taxable bond funds (ex-ETFs) witnessed net outflows, handing back $1.4 billion this past week—while posting a 0.18% market decline on average for the fund-flows week. The short/intermediate investment-grade funds macro-group attracted the largest draw of net money for the week—but taking in just $171 million, followed by emerging markets debt funds (-$53 million) and world income funds (-$63 million). General domestic taxable fixed income funds (-$245 million) suffered the largest net redemptions, bettered by alternative bond funds (-$160 million) and government and Treasury fixed income funds (-$156 million).

The municipal bond funds group posted a 0.18% market decline on average during the fund-flows week (their second weekly market decline in a row) and suffered net outflows for the seventh consecutive week, handing back $1.4 billion this week. Only California Municipal Debt Funds (+$19 million), California Short-Intermediate Municipal Debt Funds (+$3 million), and Massachusetts Municipal Debt Funds (+$0.2 million) witnessed net inflows. The General and Insured Municipal Debt Funds classification witnessed the largest net outflows of the group, handing back $544 million, bettered by High Yield Municipal Debt Funds (-$433 million).