Following The Money, February 2019

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Following The Money, February 2019

At the end of every month we get a jump-start on looking at recent money flow data. The analysis here serves two purposes. First, it shows which asset classes and sectors are seeing incremental buying interest and that (sometimes) explains recent price action. Second, it provides readers with a useful perspective on where other investors are putting incremental money to work.

Using data from the Investment Company Institute and ETF resource, we have 3 points to make on money flows through February 24th:

#1: The early-year push of fresh money into equities is now over, but fixed income is still seeing broad investor interest.

  • Week 1 of 2019 saw $11.3 billion of combined mutual/exchange traded fund equity buying, versus $6.3 billion into bond funds. Since then every week through mid-February (latest ICI data available) shows larger inflows into fixed income than equity, however. Year-to-date, bond fund inflows now total $56 billion; equities flows are now actually negative $2.4 billion YTD.
  • You can blame mutual funds (read “retail investors”) for this reversal. Equity mutual fund flows were strong in the first few weeks of 2019, but turned negative in the first half of February. Fixed income mutual funds, by contrast, have been running weekly inflows of $5 billion to as much as $12 billion.

#2: Looking at just ETF money flow data, where we have data through yesterday, there are, however, some nascent and promising equity inflows. A wide variety of investors use ETFs, from hedge funds to day traders, robo-advisors and cost-conscious long-term individual investors, so the data here reflects a broader perspective than mutual funds alone.

  • Total year-to-date ETF inflows are just $13.5 billion, but $8.1 billion (i.e. over 50% of the YTD total) did come in over the last week, the continuation of a trend that extends back through the prior month (+$18.2 billion).
  • Looking at just equity ETFs, YTD flows are still -$13.2 billion, but the last week shows inflows of $7.8 billion (the prior 3 weeks were -$2.4 billion). The same holds true for US equity ETFs: -$20.2 billion YTD but +$6.5 billion in the last week (prior 3 weeks were -$4.6 billion).
  • Emerging market equity ETFs have been strong asset gatherers all year: +$12.1 billion YTD, and +$910 million in the last week.
  • Flows into bond ETFs have slowed/reversed: $23.1 billion YTD, but -$395 million in the last week (after receiving +$10 billion in the prior 3 weeks), with that capital apparently flowing into equities, as noted in the prior points.

#3: As far as what sorts of investment strategies and sectors are seeing the greatest ETF inflows of late, the data shows a mixed bag in terms of risk appetites:

  • Both Growth and Value strategy ETFs are starting to see buying interest, with +$229 million/+$286 million of inflows respectively over the last week (and negative flows for both over the prior 3 weeks). Value funds are, however, digging out of a larger YTD hole, with total 2019 redemptions of $3.5 billion versus $1.6 billion for Value.
  • Dividend-oriented strategies are seeing more interest than momentum over both the YTD (+$156 million vs. -$497 million) and the last week (+$256 million vs. +$118 million).
  • Sector-specific funds are finally catching some interest, especially Health Care (+$886 million 1-week flows), Industrials (+$800 million), Technology (+$305 million), and Financials (+$294 million). All were either flat or negative in terms of money flows over the prior 3 weeks.
  • Fixed income ETF investors are finally pushing out on the quality curve, with high yield fund flows +$874 million in the last week versus +$312 million for investment grade products. As for duration, short-term bond products are seeing the largest redemptions over the last week (-$2.8 billion) and month (a total of -$3.7 billion).

The upshot to all this:

  • First, on the equity side: early days, but 2019 is shaping up a lot like prior years in terms of money flows. The start-of-year retail investor rush (via mutual funds) has petered out, at least for now. Further gains may pull them back in (perhaps through ETF buying, as we’ve seen in the last week), but corporate buybacks remain the primary source of capital inflows for US stocks.
  • As far as fixed income, investor interest remains very strong (last week’s small ETF outflows is likely a blip) even as yields are nowhere near their 2018 levels. The first full week of February saw total bond fund buying of $16.1 billion, greater than 8 entire months last year.
  • What we’ll be watching in March: just how bad Q1 US corporate earnings will be, and what that does to stock buyback levels. One can only imagine the Board of Director Capital Committee meetings on this topic as we wrap up the first quarter. This is the most important issue when it comes to equity market money flows, as the aggregate data we have presented in this note clearly shows.