Despite January's run-up in stocks, investors headed to bonds

More than $46B went to taxable bonds last month, versus $17B flowing into stock funds and ETFs

Feb 9, 2018 @ 12:59 pm

By John Waggoner

Investors poured a net $17.1 billion into stock funds and exchange-traded funds in January. But before you start chuckling about how people get into the stock market just before it heads south, the vast majority of fund flows last month — and over the past 12 months — have gone to bond funds, according to Morningstar Inc.

The Standard & Poor's 500 index has fallen 10.6% since Jan. 26, according to S&P, notching the first decline of 10% or more in two years. A 10% sell-off is considered an official correction.

The biggest chunk of money bound for stock funds and ETFs in January went to large blend funds — funds that look for growth at a reasonable price for large-company stocks. Those funds and ETFs saw a net new inflow of $30.5 billion. On balance, all of those flows went to passive funds and ETFs: Investors yanked $7.3 billion from active funds and invested $37.8 billion into passive funds.

Nevertheless, the flows to stock funds and ETFs pale in comparison with the money that went to taxable bonds ($46.9 billion) and international stocks ($41.9 billion). And that's been the story writ large for the past 12 months.

The 12-month flows to funds and ETFs:

• U.S. stock funds and ETFs: $33 billion

• Foreign stock funds and ETFs: $271 billion

• Taxable bond funds: $406 billion.

"Even though we see U.S. and global markets selling off, investors have positioned themselves in a more defensive manner, seeking the relative safety of bonds, despite rising interesting rates," said Todd Rosenbluth, senior director of mutual fund and ETF research at CFRA.

The average intermediate-term bond fund, the most popular fund with investors last month, has fallen 1.59% this year, compared to the 3.4% decline for the average large-cap blend fund.

Much of the money flowing into U.S. stocks this year has gone into ETFs, rather than traditional mutuals funds. Stock ETFs saw net inflows of $34 billion in January, while U.S. stock mutual funds watched $34.8 billion walk out the door. And the popularity of ETFs might explain some of the stock market's recent volatility.

"Retail mutual fund investors have historically been surprisingly patient," Mr. Rosenbluth said. "The challenge here is that if volatility persists, that patience is likely to wear thin."

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