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Passive U.S. Funds Get Boost in July: Morningstar

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Asset flows into passive U.S. equity funds for July was $14.1 billion, compared with $3.4 billion in outflows in June, according to Morningstar‘s Direct Asset Flows report. On the active fund front, investors withdrew $11.2 billion, compared with outflows of $17.1 billion in June.

July also saw higher inflows into U.S. open-end mutual funds and ETFs than international funds,  which the report stated has been  “a relative rarity in recent years.”

Other findings showed a healthy interest in passive investing, including:

  • After outflows of $22.1 billion from long-term U.S. open-ended ETFs in June, $32.1 billion came back in July.
  • Taxable-bond funds had the largest inflows in July of all investment categories, $24.8 billion,  two-thirds from passive funds.
  • Two categories in actively managed funds did not see outflows in July: taxable bonds and municipal bonds.
  • Ultra-short bonds were the most popular — for the fifth consecutive month — of all Morningstar categories, with $6.8 billion in inflows.
  • World large-stock and large-growth categories were the least popular with $3.0 billion in outflows for the month.
  • Of the large fund firms, Vanguard and State Street SPDR funds had their strongest inflows since January, the report stated. Vanguard had $15.4 billion in inflows, while State Street had $10.5 billion in inflows.

Report authors senior analyst Kevin McDevitt and associate analyst Michael Schramm noted that “after strong inflows in 2017, interest in international equity funds has waned in recent months,” with inflows falling to just under $500 million in July.

That said, McDevitt told ThinkAdvisor that overall in the last 12 months, combined active and passive U.S. equity funds inflows have been a net $11 billion, “which isn’t that much when you look at overall size of the market,” he said.

He also said strong inflows to the international equity market during the past year hasn’t been “performance driven” when you look at the S&P 500 making new highs while the international markets returns were generally weaker. “Sometimes the narrative is that investors are always chasing returns, but that’s not the case here,” he said.

However, foreign large-blend funds “dominated” the group with $5.1 billion in inflows. Emerging market funds received nearly $600 million in July, after two months of outflows, the report stated.

While ultrashort bond funds had $6.8 billion in inflows, short-term bond and short government funds together had only $700 million in inflows.

The report stated, “In an environment where the Fed is raising interest rates, an investor segment appears unwilling to take interest-rate risk above a certain threshold. Perhaps a flattening yield curve makes going out beyond one year less appealing.” They pointed out, however, that some investors don’t have that fear, as intermediate-term funds had $3.8 billion in inflows in July and long government funds had $3.0 billion.

Morningstar computes the flows by estimating the net flow in assets that is not explained by performance of the fund.

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