Is the Latest Equity Mutual Fund Demand for Real? | ETF Trends

Key Takeaways

  • Equity mutual funds broke an almost year-long streak of weekly outflows as investors added a rare $1.2 billion into these products in the week ended February 10.
  • There have been only 14 weeks since the beginning of 2018 when equity mutual fund managers collectively had fresh cash to work with instead of dealing with redemptions.
  • In the last three calendar years, investors pulled $1.3 trillion out of equity mutual funds, with $1.1 trillion flowing into ETFs. CFRA does not expect the momentum to end — as more asset managers are offering investors a choice of structures run by the same managers.

Fundamental Context

After 44 consecutive weeks of outflows, equity mutual funds gathered net new money. Equity mutual funds gathered $1.24 billion of net inflows in the week ended February 10, according to data from Investment Company Institute (ICI), an industry group representing mutual funds, ETFs, and other investment companies. This rare occurrence was driven by demand for international equity mutual funds. Last week, $2.0 billion flowed into developed international market funds and $1.8 billion into emerging market products. While domestic equity mutual funds experienced net outflows of $2.6 billion in the seven-day period, this was down sharply from $11 billion from the prior week and was the lowest weekly level since mid-September 2020. U.S. mid- and small-cap domestic equity funds had net inflows last week, but this was offset by outflows for large-cap and multi-cap.

The last time asset managers collectively had new cash to work with, the U.S. stock market was recovering from the pandemic-induced bear market. In the week ended April 1, 2020, domestic equity mutual funds pulled in $8.2 billion but this short-lived action only partially recouped the $58 billion of net outflows in the prior two weeks.

Chart 1: Weekly Net Flows for Equity Mutual Funds Since 2017

While we hope the bleeding slows, consecutive weeks of equity net inflows are a rare occurrence. The three-week period ended January 23, 2019, was the last time there were back-to-back weeks of new money for equity mutual funds. Back then, domestic equity funds were the driver, with the asset category gathering a collective $8.8 billion, more money than $5.9 billion for world equity funds. However, since 2018, ETFs have gained market share and more asset managers including American Century, Clearbridge, Dimensional Funds, Fidelity, and T. Rowe Price have launched active ETFs run by the same personnel as popular mutual fund strategies. These include American Century Focused Dynamic Growth ETF (FDG), Clearbridge All Cap Growth ETF (CACG), Dimensional US Core Equity Market ETF (DFAU), Fidelity Magellan ETF (FMAG), and T. Rowe Price Blue Chip Growth ETF (TCHP).

Since the beginning of 2018, there were just 14 weeks when equity mutual funds gathered new money, equal to just 8.7% of the time. Coincidentally, equity mutual funds also had a 44-week cold stretch that ended in the week of March 11, 2020, with $8.3 billion of net inflows.

In contrast, the $11 billion of net inflows for taxable bond mutual funds extended the weekly inflow streak to 15. With one weekly exception around the November 2020 election, the category has pulled in new money for 43 weeks in a row. Investors remain much more loyal to their bond mutual funds than equity ones.

Equity ETFs have dominated in recent years, with $1.1 trillion of net issuance occurring since 2018. Some of the ETF demand stems from the $1.3 trillion of net outflows equity mutual funds incurred in the same period, but investors are also replacing individual stock positions with more diversified ETFs. Overall, many increasingly choose the typically lower-cost, more tax-efficient ETF product; these investors often benefit by seeking to replicate a benchmark rather than attempt to outperform. Although people continue to choose index-based mutual funds such as Vanguard Total Stock Market Fund (VTSAX), others pick Vanguard Total Stock Market ETF (VTI) or other ETFs.

Chart 2: Net Inflows to Equity ETF vs. Equity Mutual Funds


CFRA expects many investors to remain loyal to equity mutual funds and to increase exposure to long-held allocations. We provide ratings on more than 16,000 mutual funds to support ongoing due diligence. However, the pendulum will likely continue to swing toward equity ETFs relative to mutual funds, especially as more asset managers offer both ETFs and mutual funds — giving investors a choice of the structure. We think consecutive weeks of net inflows for equity mutual funds will be a rare occurrence in 2021.

Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.