U.S. equity funds are having one of their toughest years attracting capital since the financial crisis, as investors shun riskier assets, a new report shows.
Investors pulled $20.8 billion from U.S. equity mutual and exchange-traded funds in June, making the first half of this year one of the worst for flows in the past decade, according to a Morningstar report Monday. Only the first six months of 2015, 2016, and 2009 were more difficult for attracting assets.
Active U.S. equity funds generally fared worse than their passive peers amid the return of market volatility this year. Although the biggest outflows last month came from five large index funds managed by State Street Corp., BlackRock, Vanguard Group, and Invesco, about 70 percent of passive equity funds had inflows, according to Morningstar.
“In a bit of a paradox, the greatest net outflows came from active U.S. equity funds, which had $17.1 billion in net redemptions versus negative $3.7 billion for passive funds,” Morningstar said in the report. “But the greatest flows from individual funds came from index offerings.”
SPDR S&P 500 ETF, iShares Core S&P 500 ETF, Vanguard Institutional Index, Invesco QQQ Trust, and Vanguard Total Stock Market Index had the biggest withdrawals among U.S. equity funds in June, according to the report. These five passively managed funds lost a combined $14.7 billion in assets.
The outflows aren't limited to the U.S. Investors fled international equity funds in June for the first time since September 2016, with an estimated $9.8 billion in outflows being the worst drawdown since 2008.
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“Investors may have gotten spooked by the turmoil in emerging markets, which left the average diversified emerging-markets equity fund down 8.9 percent over the past three months,” Morningstar said.
Diversified emerging-markets equity funds reported about $8 billions of outflows, the greatest net redemption in at least a decade, according to the report. The next biggest withdrawals were $3.9 billion from Europe-stock funds and $1.3 billion from Japan-stock funds.
As investors reduced their exposure to riskier assets in June, moving money out of equity and into bonds, they demonstrated caution in where they placed their assets within fixed-income. While conservative ultra-short bond funds remained popular, investors pulled $3.4 billion from high-yield bond funds, the report shows.
“Taxable-bond funds were the only long-term group with substantial inflows, as they collected $15.5 billion in June,” Morningstar said. “But here, too, investor risk aversion shone through.”