The Fed publishes the Financial Accounts of the United States on a quarterly basis.
This excellent compilation was updated through Q4-2016 on March 9.
It is an overwhelming amount of data about the flows and levels of assets and liabilities in the US capital markets. Debbie and I are always coming across something either new or that we had overlooked before.
We recently sorted out the data available for US-based equity mutual funds and ETFs. We were especially pleased to find that data are available for both by “investment objective” under the following categories: domestic equity funds, world equity funds, hybrid funds, taxable bond funds, and municipal bond funds. They appear in Table F.122 in the Fed’s publication for mutual funds and F.124 for ETFs.
As is our nature, we posted them all in a new chart publication titled Mutual Funds & ETFs By Investment Objective.
Let’s focus on equity funds that invest in US stocks only and those that invest around the world, using four-quarter sums to smooth out the quarterly volatility:
(1) Domestic funds. On a combined basis, domestic equity mutual funds and ETFs contributed to the previous bull market with sizable net inflows, particularly during late 2003 through 2005 (Fig. 1). Net inflows dried up from 2008 through early 2011. Then there was some significant selling during the second half of 2011 and in 2012 before buyers came back in 2013 and 2014. Despite some selling at the beginning of last year, there was a tiny inflow of $8 billion into domestic funds last year.
Focusing on domestic equity mutual funds, we see that the bear market of 2000 slowed net inflows, but they remained mostly positive right through the next bull market that started in 2003, with a brief period of minor net outflows during late 2002 and early 2003 when corporate accounting scandals might have scared off some retail investors. They turned into consistent sellers during the bear market that started in late 2007 and never really came back: Outflows continued unabated; in fact, only seven of the past 38 quarters have had net inflows based on four-quarter sums for US mutual funds investing at home.
On the other hand, domestic equity ETFs never experienced any net outflows on this basis since the start of the data during Q4-2002. The trend has been mostly upward for these net inflows, with a record high of $167.5 billion last year. The actual Q4-2016 net inflow was a whopping $413.0 billion (saar). This may very well have reflected the animal spirits unleashed by Trump’s election, though it certainly didn’t show up in domestic mutual funds, which had record net outflows totaling $159.5 billion last year, with the actual Q4-2016 outflow at $174.1 billion (saar).
(2) World funds. Since the start of the four-quarter-sum data during Q4-2002, net inflows into US mutual funds and ETFs that invest globally have been negative during only five quarters (Fig. 2). During the bull market from Q4-2002 through Q3-2007, they attracted $607 billion in net inflows, while domestic funds (mutual and exchange-traded) had net inflows of $476 billion. So far, during the current bull market since Q1-2009 through Q4-2016, world equity funds had net inflows of $1.0 trillion, while domestic ones had $227 billion.
Both equity mutual funds and ETFs contributed to the popularity of global investing during the latest two bull markets, presumably mostly by American investors. Interestingly, they both became much less less popular last year. Among the domestic and world funds, the category that stands out as attracting a record net inflow is domestic ETFs. It’s arguable that investors responded to Trump’s “America First” presidential theme by jumping into US ETFs that invest only in American companies.
That could change if Trump continues to soften this theme and adopts a more centrist foreign policy. Already, the new administration’s policies are looking less and less protectionist, as most recently evidenced by giving the Chinese government a pass on getting labeled as currency manipulator, while offering to ease off on trade issues if the Chinese do something about North Korea’s Li’l Kim.
(3) Monthly data. The Fed’s quarterly funds data are mostly based on the monthly series compiled by the Investment Company Institute (ICI). Because that data are also volatile, we track the 12-month sum of the net inflows, which are available for domestic versus world mutual funds based in the US (Fig. 3). They show that over the past year through February, all mutual funds had a total net outflow of $161.3 billion, led by domestic mutual fund outflows of $159.8 billion, while international ones lost just $1.5 billion.
What about ETFs? Understanding the monthly flows into domestic versus world ETFs is a bit more complicated because ICI only provides net issuance of shares by all US-based ETFs, combining those that invest in equities and bonds. The former continue to attract most of the inflows. The share issuance data show US ETFs raising a record $368.0 billion over the past 12 months through February, led by $227.5 billion going into domestic ETFs, followed by $53.1 billion into international ETFs (Fig. 4).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.