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Retail Investors Pull Back From Equity And Bond Funds

For the fund flows week ended November 11, the benchmark Dow Jones Industrial Average lost 165 points to settle at 17,702. Equity mutual fund investors made net redemptions of $1.7 billion for the week (of which $765 million was from large-cap funds), while equity exchange-traded funds saw net inflows of $643 million. A sour market in bonds (a decline of 0.64% for the week) may have led bond mutual fund investors to redeem shares. Overall, taxable bond mutual funds saw net outflows of $875 million for the week, which was the first outflow after four previous weeks of inflow activity. Money market funds saw net inflows of $6.5 billion, of which institutional investors added $11.3 billion and retail investors cashed out $4.8 billion. By Jeff Tjornehoj For the fund flows week ended November 11, the benchmark Dow Jones Industrial Average lost 165 points to settle at 17,702. Equity mutual fund investors made net redemptions of $1.7 billion for the week (of which $765 million was from large-cap funds), while equity exchange-traded funds (ETFs) saw net inflows of $643 million; investors backed out of the SPDR S&P 500 Trust ETF ( SPY , -$1.5 billion) and made modest contributions to the iShares Russell 2000 ETF ( IWM , +$1.6 billion) and the iShares MSCI EAFE ETF ( EFA , +$1.3 billion). A sour market in bonds (a decline of 0.64% for the week) may have led bond mutual fund investors to redeem shares. Overall, taxable bond mutual funds saw net outflows of $875 million for the week, which was the first outflow after four previous weeks of inflow activity. With no end in sight to the asset bleeding, Lipper’s Loan Participation Funds classification (-$213 million) marked 16 weeks of outflows by retail investors. Like their equity counterparts, high yield funds suffered outflows (-$543 million) among mutual fund investors, but unlike equities also saw net outflows on the ETF side (-$1.3 billion). Overall, bond ETFs saw $2.8 billion of net outflows. The week’s biggest bond ETF net outflows belonged to the SPDR Barclays Capital High Yield Bond ETF ( JNK , -$1.2 billion), while the iShares Core Total US Bond Market ETF ( AGG , +1.3 billion) led the net inflows list. Municipal bond mutual fund investors added $229 million net to their accounts, and those funds now have had inflows for six straight weeks – for their best showing since March. Money market funds saw net inflows of $6.5 billion, of which institutional investors added $11.3 billion and retail investors cashed out $4.8 billion. For more analysis please watch this video:

The Difference Between ‘Investors’ And ‘Traders’

I received a lot of complimentary comments on my last post ( Relax, have a glass of wine ) in which I urged investors to take a deep breath and focus on the market fundamentals which indicated that the macro backdrop was tilted bullishly. However, there was a small minority whose comments ran to the tone of the post being ridiculous advice. The latter group undoubtedly were highly short-term focused and belonged to the community of traders. I would like to take this post to distinguish between my two personas, namely my inner trader and inner investor. During the current period of market turmoil, my inner trader has to deal with many challenges, not the least of which are the wild daily and overnight swings in asset prices. By contrast, my inner investor (and underline the term “investor”) takes a much more longer term view. The typical “investor” and can only check the market briefly during the day and only trades occasionally. They certainly do not have the time, resources or inclination to be fret over and trade swings in overnight stock index futures. While the recent stock market downdraft has been surprising, the average diversified investor hasn’t really been hurt very much. That’s because the bond market has acted as a very good diversifier, unlike 2008 when market contagion leaked into the credit markets. To illustrate my point, imagine someone with a portfolio with a passive 60% stocks and 40% bond allocation. He invests the stock portion into SPY and the bond portion into AGG . The simulation assumes that all income is re-invested back into the ETF of the respective asset classes (SPY dividends to SPY and AGG income into AGG). Once a year on December 31, he re-balances the portfolio back to the target 60-40 weight. Here is a chart showing how far his equity weight is off his 60% target since September 2003, when the data series for AGG began. As of Tuesday, August 25, 2015, the worst day of the stock market drawdown so far, the portfolio was underweight its stock benchmark by only 2.2%, which means that the bond market rallied enough to make up most of the losses suffered by equities. Contrast that with past experiences in 2008 when the equity weight cratered, or even the correction of 2011 when bond diversification had a less adequate effect. (click to enlarge) In 2015, diversification worked! Investors who have diversified portfolios shouldn’t really be freaking out. So relax, have a glass of wine *. * Investors who made the decision to be 100% equities either made the conscious investment policy decision to assume equity volatility in return for a higher rate of return, or the current episode taught them a valuable lesson on the importance of an investment policy. Disclaimer: The opinions and any recommendations expressed in this blog are solely those of the author. None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

The 3 Key Elements Of A Bond ETF

As the Head of Fixed Income Strategy for iShares, I am fully versed in the seemingly complex world of bond ETFs. I wanted to take a little time to explore the basics for you, because the only way to fully appreciate the benefits that this type of investment can offer is to first understand how they work. First things first – here are three key elements that every investor should know: 1. A bond ETF typically tracks an index. While there are a few actively-managed fixed income ETFs, for our purposes we’ll focus on index-based products, which generally seek to track the performance of an index minus fees and expenses, and make up the majority of bond ETFs out there. Like equity indexes, bond indexes typically target a specific part of the market – such as a specific sector (e.g. Treasuries, corporates), credit rating (e.g. Aaa-A), or maturity range (e.g. 7-10 years). Bond indexes combine these elements in a variety of ways, allowing investors to access both broad and narrow segments of the bond market through the ETFs that track them. For example, you can access the total investment grade bond market through a fund like the iShares Core Total US Bond Market ETF (NYSEARCA: AGG ), or specifically target U.S. corporate bonds through a fund like the iShares Aaa-A Rated Corporate Bond ETF (NYSEARCA: QLTA ). Bottom line: Understanding the underlying index is key to knowing what you own in a bond ETF. 2. A bond ETF’s current price is visible and updated throughout the day on an exchange. While some investors appreciate the fact that they can trade an ETF intraday, others may never take advantage of this feature. And that’s okay, because the mere fact that bond ETFs trade on the stock exchange is still a benefit for those investors, because it provides price transparency in an otherwise opaque market. Individual bonds trade over-the-counter (OTC), which means that buyers and sellers negotiate individually in order to reach a deal. As a result, bonds can be hard to track down and quotes from different brokers can vary widely. In contrast, investors can see bond ETF execution prices on an exchange throughout the trading day. You can see what price at which you can buy and sell the ETF, allowing you to make more informed decisions about your bond investments. This can be particularly powerful during periods of time when markets are moving quickly or segments of the bond market are experiencing illiquidity. Bottom line: Whether you intend to trade or not, the fact that bond ETFs offer transparent pricing arms you with valuable information that can help you make an informed investment decision. 3. A bond ETF is managed by a human (sometimes several). A common misconception about bond ETFs is that they simply hold all the securities in the index they track, rendering a portfolio manager (PM) unnecessary. This is actually a flattering assumption; because if a bond ETF manager or PM is doing the job correctly investors are simply getting the exposure they expect, without much deviation from the performance of the underlying index (otherwise known as tracking error). The actions of the bond ETF manager are invisible. The truth is that there is a lot of work going on behind the scenes to make this happen. Bond indexes can hold hundreds and sometimes thousands of bonds, some of which are illiquid or thinly traded. As a result, a bond ETF manager is required to construct a portfolio that tracks the index as closely as possible using only the securities that are available at any given time. This can be particularly tricky in certain situations (for example, an illiquid market segment like high yield), but a good PM is able to navigate a range of market environments. Bottom line: Bond ETFs do have portfolio managers, and a skilled one will work to minimize tracking error on an ongoing basis so that investors get the exposure they’re seeking. Of course, there’s much more to the story than this, but these three points really get to the heart of what a bond ETF is. Original Post