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Investors have pulled a net $31 billion from U.S. equity mutual funds and exchange-traded funds in the past six weeks, according to Refinitiv Lipper data through Wednesday. That marks the longest streak of weekly net outflows since last summer and the most money pulled in aggregate from domestic equity funds to start a year since 2016.
Over the same period, investors have funneled roughly $12 billion into international equity funds, about $24 billion into taxable bond funds and nearly $3 billion into municipal bond funds.
Flows toward funds outside of domestic equities indicate a level of apprehension from investors who aren’t buying the 2023 rebound in U.S. stocks, some analysts say. The outflows provide little reassurance to investors wrestling with fears that market sentiment could be turning. Last week, the S&P 500 dropped 1.1%—its first weekly decline of the year—trimming its 2023 gains to 6.5%.
“The sense of opportunity certainly lies elsewhere,” Cameron Brandt, director of research at fund-flow and allocation data provider EPFR, said of U.S. equity funds.
The exodus from U.S. stock funds underscores the divergence between investors skeptical of the market’s year-to-date rise and those eager to ride the wave higher. Some investors are putting money into ultrasafe fixed-income assets and choosing funds of cheaper stocks abroad.
Others are going all in on speculative stocks and turbocharging those bets with risky options trading. Some are racing to scoop up shares of individual stocks like
Tesla Inc.,
pushing the electric-vehicle company’s stock up 60% to start the year.
The 2023 rebound has been driven in part by hopes that the Federal Reserve will cut interest rates later this year as inflation moderates—though central bank officials have repeatedly said they see higher rates for longer to try to ease price pressures. January’s stronger-than-expected jobs report served as a reality check for some investors, forcing them to reconsider their expectations for Fed policy.
This week, investors are awaiting the latest data on consumer and producer inflation and retail sales to gauge the extent to which the Fed’s monetary policy is cooling the economy. Companies including
Coca-Cola Co.
,
Paramount Global
and
Applied Materials Inc.
are set to report quarterly results as investors continue to parse earnings for insights about the outlook for corporate profits.
Elevated interest rates have sent some investors reaching for bond funds as fixed-income assets offer the highest yields in more than a decade with minimal risk. The yield on the Bloomberg U.S. Aggregate Bond Index is 4.5%, outpacing the 1.7% dividend yield on the S&P 500.
And investors are rotating toward international equity funds as shares of companies overseas have outperformed U.S. peers in recent months, boosted by a weakening dollar, optimism about China’s reopening and attractive valuations.
Companies in the S&P 500 are trading at roughly 18 times projected earnings over the next 12 months, according to FactSet. That compares with the STOXX Europe 600’s multiple of around 13 and the Hong Kong Hang Seng Index’s multiple of about 10 on a local-currency basis.
“It’s definitely a sign that markets are still cautious, certainly for a segment of the investing public,” said Mr. Brandt.
Meanwhile, the gulf between single-stock buying and ETF selling so far in 2023 is the widest on record going back to 2008, according to Bank of America analysis of client equity flows released Tuesday. Clients have made net purchases of more than $15 billion in single stocks year to date, while ETFs have seen more than $10 billion of net outflows.
The preference toward individual stocks reflects a more supportive backdrop for active management, according to Jill Carey Hall, U.S. equity strategist at Bank of America.
Passive investing, or simply following the market, has gained traction since the launch of the first ETF three decades ago. But last year, stock picking made a comeback as the megacap technology stocks that are heavily weighted in the major U.S. indexes struggled in an elevated interest-rate environment.
“We haven’t had to think about index construction in a long time because it was always ‘buy growth’ and ‘buy U.S. stocks,’ and now we’ve totally flipped that,” said Todd Sohn, ETF strategist at Strategas Securities. “Investors and traders are trying to pick more quality names rather than playing the market through the indices.”
Clients this year are asking Mr. Sohn more about actively managed ETFs and bond ETFs, he said.
Other investors and strategists are interpreting flows to individual stocks as a sign of speculative buying this year, as single stocks can be riskier than funds that are diversified. Many of the top-performing stocks in 2023 have been shares of growth-oriented companies that aren’t expected to be profitable until many years in the future.
“Some market participants are ramping up the level of risk they are willing to take,” said
Peter Boockvar,
chief investment officer of Bleakley Financial Group. He said he likes energy and international stocks, while expecting interest rates to remain elevated this year.
A flurry of activity in the options market, particularly around bets on technology stocks, to start the year exemplifies the risk appetite of some investors.
Among individual investors, net purchases of single stocks have climbed since the start of the year, while net buying of ETFs has stagnated, according to Vanda Research data.
For individuals, single-stock buying has been dominated by one market darling: Tesla. Over the past several weeks, Tesla has accounted for roughly a third of all single-stock net purchases by individual investors, Vanda found.
David Jacobson, a 39-year-old high-school teacher in the suburbs of Chicago, said he bought Tesla shares for the first time in December, and he has gradually increased the position over the past few months. Before that, he was only invested in funds tied to indexes like the S&P 500 and Nasdaq Composite, he said.
Mr. Jacobson added that he chose to buy Tesla shares, rather than rely on exposure to the stock through index funds, because the low share prices looked too good to pass up.
“I see a dip as a buying opportunity for a high-quality stock,” he said. “You just have to have faith that it’ll come back.
Elon Musk
is the Steve Jobs of our time.”
Write to Hannah Miao at hannah.miao@wsj.com
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