Since the start of 2008, U.S. equity mutual funds have experienced total net outflows of more than $360 billion. In only one of these years, 2013, were net flows to equity mutual funds positive, according to the Investment Company Institute (ICI).

This data would be an omen for the U.S. stock market, except for the fact that these have been years of explosive growth in exchange-traded funds (ETFs).

As the argument goes, if ETFs have captured any flows equity mutual funds have lost, the stock market hasn’t been harmed. It’s just a shift in investor sentiment, away from actively managed and higher-cost mutual funds into lower-cost indexed ETFs.

Recently, the ICI changed the way it reports weekly net flows on the Statistics page of its web site, combining data for both mutual fund net flows and ETF net issuance. (Previously, the page showed only mutual fund weekly flows.)

This gives you a nearly real-time window for following – and explaining to clients – the story that combined fund flows are telling about big-picture trends.

What does the current data show?

The growth of equity ETFs did offset stock mutual fund losses through the end of 2014. However, net outflows from all stock funds increased to $96 billion in 2015 and are on pace for about the same rate in 2016. All of the net outflows are in U.S. domestic stock funds, while world funds have continued to attract new money.
In 2016, money has been gushing from U.S. stock funds into bond funds. Total net inflows to bond mutual funds and ETFs are averaging about $20 billion per month.

Several trends suggested by this data may be important for helping clients achieve financial goals – especially if the current trends continue. For example:

Baby Boomers are retiring in droves and downshifting risk by moving money from stock to bond funds. Also, Millennials are starting to invest, and many don’t seem to have much appetite for equities.
Investors of all ages suffered portfolio damage in the 2008-09 stock market crash, and the memory may be hard to shake. Some fund investors may have lost confidence in the U.S. stock market, in part because they think it’s rigged in favor of high-frequency traders. Perhaps they also feel there are better economic growth prospects abroad than in the U.S.

If the combined fund flows data continues to show net outflows from U.S. stock funds, it doesn’t mean the U.S. stock market will decline. It’s possible stock market indexes could be maintained at current levels by demand from pension funds, hedge funds, stock buy-backs, prop trading desks and central banks.

However, clients may want to assess how the market’s risk/reward characteristics might be different if retail investors go into permanent retreat. The data doesn’t show they doing that are yet – but it bears watching. See additional thoughts on this trend.

Instant Insights /

Help clients monitor combined mutual fund-ETF flows and trends

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