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An economic indicator: Why fund flows should concern investors

Part 5
An economic indicator: Why fund flows should concern investors (Part 5 of 7)

February 2014: Second week witnesses positive net inflows

Investors moved in approximately $11 billion into equities-focused ETFs during the week ended February 13, 2014. There was a $9.24 billion total inflow into the U.S. equity ETFs, as markets surged. This was in response to the Federal Reserve Chairman Janet Yellen’s assertion to stay the course on reducing the central bank’s economic stimulus. Fixed-income ETFs experienced total inflows of $2.6 billion, which paled in comparison with the first week’s $11.26 billion in fixed income inflows, but the investors continued to be optimistic about the market.

4 Weekly IntflowEnlarge GraphOverall, investors piled $14.0 billion into ETFs in the week, pulling the total U.S.-listed ETF assets up by 3.4 % to $1.683 trillion. Markets rallied around Yellen’s cautionary statements about recent weak job gains, citing arctic winter conditions that adversely affected the economy and job market. So, investors rewarded equities as well as purchased bond funds to neutralize any additional risks from greater exposure into equities. Equity ETFs like XLE which has Exxon Mobil Corporation (XOM) and Chevron Corp (CVX) in its portfolio benefited from this trend.

The SPDR S&P 500 ETF (SPY) led all equity funds, raking in $5.3 billion last week, bringing its total assets up to $154.0 billion. The Pimco 0-5 Year High Yield Corporate Bond (HYS) led all bond inflows, pulling in $504.7 million. The iShares U.S. Industrials (IJY) was the least popular ETF in the week, redeeming $636.6 million, bringing its assets down to $1.28 billion.

4 Weekly OuttflowEnlarge GraphAs 2014 began, the consensus expectation was for accelerating economic growth and continued weakness in bonds. But as economic indicators like started sending mixed signals, for example, higher economic growth coupled with higher unemployment figure and low housing market data, there was growing uncertainty over the overall economy and investors once again began to appreciate the various risks that continue to permeate the global economy. This resulted in corresponding rally in bonds. This is a typical investor reaction to prefer yield over price appreciation when unsure about where to invest and is called “flight-to-safety.”

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