Vanguard, the largest mutual fund provider in the world, suffered net outflows in June, marking the first time in nearly 20 years that the firm has had investors pull more money out than they put in—a reflection of aversion to fixed-income investments at a time when the Federal Reserve has begun signaling that the beginning of the end of the post-crash era of loose monetary policy may be in sight.
Indeed, net outflows of $100 million out of Vanguard funds were fueled by bond-fund redemptions totaling $9.7 billion. Another $400 million in outflows from balanced funds meant that inflows into equity funds and money market funds of $4.8 billion and $5.2 billion, respectively, weren’t enough to offset the bond-fund redemptions, according to data provided by Vanguard.
“All streaks must come to an end, whether you’re DiMaggio, Ripken or Vanguard,” Vanguard’s head of public relations, John Woerth, said, comparing the Valley Forge, Pa.-based fund company to two famous streaks in professional baseball.
Appropriately enough, the last time Vanguard suffered any outflows was in December 1994, two months after a dramatic and unexpected 50-basis-point increase to the Fed funds rate by the Greenspan Fed, and at the end of a year that saw bond investors get clobbered as the Fed tightened access to credit amid signs of growing inflationary pressures in an expanding economy.
The point is that Vanguard, the first and most influential proponent of index investing, was, like other fund companies, caught in the middle of an investing public that is growing skittish at the prospect of the Fed’s quantitative easing and zero interest rate policies coming to a close.
“It was emblematic of investors just growing wary of bond funds, given the signals made by the Fed,” Woerth said, noting that other big and influential fund companies such as Pimco had outflows in June.
The overall outflows data for the entire mutual fund industry were much more skewed to bond funds than Vanguard’s redemptions, according to the Investment Company Institute (ICI), the mutual fund industry’s Washington, D.C.-based trade group
Through June 26, the latest data from the ICI that are currently available, show that investors pulled $60 billion out of U.S. bond funds, while adding just $200 million to equities funds.
From a strictly ETF perspective, Vanguard suffered redemptions of $944 million, and because the company’s ETFs are a separate share class of its mutual funds, it’s quite likely that the stock/bonds breakdown of the ETF outflows would be similar.
Industrywide, ETF outflows set a record in June of $12 billion, with about $7.3 billion each in both equity and bond funds, plus another $2 billion in commodity funds offset by almost $5 billion in equity inflows.
Vanguard is currently the biggest mutual fund company in the world, with assets of about $2.2 trillion.
Smart beta isn’t smarter than cap weighting, but it is different, and that’s good.
Trial by fire is one way to discover why ETF transparency matters.
Most people now realize leveraged ETFs can hurt you, but how, then, to use them?
What would a shift out of a mutual fund and into an ETF look like up close?