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Advisors - April 22, 2021

Strong Start Boosts Confidence: Q1 2021 Fund Flows

With another year come and gone (in the case of 2020: hoorah!) and a new president inaugurated, 2021 leapt off the starting blocks with both a rising stock market and interest rates shooting higher. In response, assets flowed to equity and bond funds alike.

The chart below shows that through the end of Q1 2021, the S&P 500 Total Return (^SPXTR) was up 6.2% and the Bloomberg Barclays Global Aggregate (^BBGATR) lost about 4.5%. After 2020 delivered a record plummet followed immediately by a record comeback, many wondered what kind of market trends 2021 would have in store. Turns out investors continued to be bullish on stocks, despite a flat January for the S&P 500.

S&P 500 Total Return Level and Bloomberg Barclays Aggregate Level Q1 2021 Changes, from December 31st, 2020 through March 31st, 2021

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So what has been the response to changing market dynamics? Where are investors going for yield—or, are they loading up on risky assets in a quest for capital appreciation?

To answer these questions, we look to fund flows.

Fund flows are the net cash inflow into a fund (purchases) or net outflow from a fund (redemptions). Irrespective of fund performance, when a mutual fund or ETF has positive fund flows (or net issuances for ETFs) in a given period, that fund’s managers then have more cash to buy more holdings. The opposite is also true: as fund holders sell shares, fund managers sell out of positions and use the cash to pay redemptions.

This means that fund flow data can indicate higher or lower demand for different asset types, depending on which funds and categories have relatively large inflows or outflows.

In just ten months following record outflows in March 2020, inflows to bond mutual funds reached a three-year high. January net flows neared $75 billion, while U.S. Equity ETF Net Issuance is 38% off its three-year high, according to ICI data. US Equity Mutual Fund Flows continued sinking, and US Bond ETF Net Issuance ticked up slightly. 

US Bond and Equity Mutual Fund Flows, US Bond and Equity ETF Net Issuance from January 31st, 2018 through January 31st, 2021

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Mutual Fund Flows: Biggest Winners and Losers

Money Market funds saw the most inflows in Q1 2021.

Despite longer-term treasury rates rising on the backs of growing inflation and economic confidence, short-term Money Market mutual funds gained $167.7 billion of assets in Q1. Intermediate Core Bond funds accumulated $46.7 billion in the first quarter, confirming its place as one of the most popular categories in the last year. Short-Term Bond funds witnessed a $24.5 billion influx as well.

most inflows mutual funds Q1 2021

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While net flows into Diversified Emerging Markets mutual funds ticked up slightly, $51.5 billion poured out of Foreign Large Blend funds in Q1. This marks the largest mutual fund outflow for the quarter, and one of the second-largest over the last 12 months. World Bond-USD Hedged funds also suffered an outflow of $26.8 billion. The flight from foreign mutual funds could potentially be due to continued uncertainty resulting from lower-than-expected vaccination rates and delayed re-openings.

most outflows mutual funds Q1 2021

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Notably, Large Blend mutual funds lost another $16.6 billion of assets in Q1 despite the March resurgence by both blend and value equities. It seems the market is undecided on whether value or growth is the true market leader (see next table below).


ETF Flows: Biggest Winners and Losers

Value’s outperformance of growth in Q1—as part of a market-wide sector rotation—resulted in $38.6 billion and $26.3 billion being added to Large Blend and Large Value ETFs, respectively. The tailwind of rising interest rates caused $15.8 billion to flow into Financial ETFs during the quarter.

most inflows ETFs Q1 2021

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Q1’s “biggest loser” was Commodities Focused ETFs, losing $10.3 billion of assets. Another $7 billion was pulled out of Corporate Bond ETFs as government debt yields became growingly attractive.

most outflows ETFs Q1 2021

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Active Managers Come Close to Matching Passive Fund Inflows

With March 2020 and all its infamy in the rearview mirror, the active fund outlook turned rosier in 2021. Active funds gained a total of $162.8 billion in Q1, with 78% coming from active mutual funds.

ARK funds dominated the Top 3 Active ETFs in Q1. The ARK Innovation ETF (ARKK), ARK Genomic Revolution ETF (ARKG) and ARK Fintech Innovation ETF (ARKF) added $7.1 billion, $2.9 billion, and $2.3 billion in the quarter, respectively.

active passive fund flows Q1 2021

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On the flip side, passive managers handily won the ETF fund battle. Though passive mutual funds lost $36.0 billion of assets, passive ETFs witnessed a $210.8 billion inflow in Q1, netting $174.8 billion for the more laid-back investing style as a whole.

Vanguard’s S&P 500 ETF (VOO) raked in $14.8 billion, the most of any passive ETF. And unsurprisingly, financials were right there in second place, with $9.2 billion flowing to the Financial Select Sector SPDR ETF (XLK).

The big decliner was the Vanguard Total International Stock ETF (VXUS), losing $52.8 billion.The market is clearly licking its chops over US equities and government debt, as a combined $35.3 billion moved out of the Vanguard Total International Bond ETF (BNDX) and iShares iBoxx Investment Grade Corporate Bond ETF (LQD).

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Equity Style Fund Flows and Performance

The table below shows a summation of mutual fund flows and ETF net issuances, plus average category performance, for the nine equity style boxes.

There were distinct winners and losers across the equity style box categories. Large-Cap Value and Blend took in a combined $46.4 billion in Q1, likely at the expense of Growth’s $35.8 billion outflow. The rotation into value also translated into meager quarterly performance for growth, whose 1.3% rise fell quite short of value’s 12.7% gain.

style box fund flows Q1 2021

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Interestingly, Small and Mid-Cap funds were largely neglected over the past year despite posting the best performances. This trend continued in Q1—Mid-Cap Value gained 16.7%, the second highest of any Small or Mid-Cap grouping, yet actually lost assets over the quarter. By the time Q2 rolls around, will Small and Mid-Cap funds have caught up?


Investors Grow Bullish — Within the US

The goal of analyzing fund flows is to uncover insights about investor sentiment. So what does the Q1 2021 data reveal?

Investors are bullish on the US for a variety of reasons. The US’s relatively larger fully-vaccinated population, accelerated re-openings nationwide, political stability, and healthy reflation activity makes for a positive economic setup, hence the heavy inflows to US funds.

The rotation from growth into value was confirmed by the asset losses in Large-Cap Growth funds. Further down the market cap chain, flows to Small and Mid-Caps are seemingly weaker than market performance data suggests. It will be interesting to see in Q2 if fund flows catch up to those respective performances, and whether or not growth funds claw back any of their Q1 losses.

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