Fund Flows Reveal Institutional Investors’ Thoughts on the Economy

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Fund Flows Reveal Institutional Investors’ Thoughts on the Economy

Daniel Cross Dec 16, 2015

Mutual Fund Flow Trends

It seems like an obvious assumption that this information tells us that investor sentiment is negative overall right now, but there’s something else to keep in mind.

Since about 2007, there’s been a consistent trend of fund flows leaving mutual funds and pouring into ETFs instead. Over the past eight years, more than $680 billion has leaked out of mutual funds, while ETFs have seen inflows of $646 billion. It’s a strong correlation that basically means for every dollar that’s left the mutual fund industry, a dollar has been invested into ETFs instead.

With that in mind, we can take a look at ETF fund flows to gain a clearer picture of investor sentiment. Unlike mutual funds, ETF flows are recorded on a monthly basis, so the most recent ICI data is taken from October. As expected, ETFs showed positive inflows.

Interestingly, there was a large difference between institutional trading and individual trading as well. October’s numbers revealed that institutional funds had a net inflow of more than $51 billion, while funds targeted to individual investors showed outflows of almost $8 billion.

The Bottom Line

Ironically, a recession could mean more investments for the mutual fund industry by investors who seek professional management after overseeing a collapse of their ETF values. Another contrarian viewpoint says that fund flows into money market accounts are actually a positive sign for stocks and that markets could be undervalued as well. This could explain the difference between institutional inflows and individual outflows for October. As we close out 2015, investors should take a look at how the year fared as a whole for fund flows to gain a macroscopic view of what 2016 might hold.

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