Passive U.S. Equity Funds Lose Fans in March

With the S&P 500 logging its first negative quarter since 2015's third quarter, investors pulled more than $21 billion from U.S. equity funds. With positive but slowed flows into taxable-bond and international-equity funds, overall long-term flows were nearly $13.4 billion in March. Money market funds had nearly $55 billion in outflows.

Strikingly, U.S. equity outflows were almost evenly divided between actively and passively managed funds. Active outflows were nearly $11 billion, while passive outflows were not far behind at about $10.6 billion. March was also the second consecutive month of passive equity outflows. Before March, passive U.S. equity funds hadn’t had outflows since April 2015. Nevertheless, these outflows don't necessarily reflect a broad trend. That's because the lion's share of outflows emanated from just two ETFs.

Among other trends last month:

• Taxable-bond funds provided a safe haven in March as interest rates fell a bit and investors funneled nearly $16 billion into them, nearly 4 times the prior month's inflows. Ultrashort-bond and intermediate-bond funds were the primary beneficiaries, collecting about $6 billion and $4.8 billion, respectively. Reflecting investors' declining risk appetite, investors lightened up on high-yield bond funds for the sixth consecutive month, with outflows reaching $3.1 billion.
• Flows remained positive for international-equity funds, despite negative first-quarter returns. Foreign large-blend funds led the way with about $13.5 billion in inflows, followed by foreign large-growth ($2.7 billion) and diversified emerging-markets ($2.7 billion) funds. Inflows into passive international-equity funds bested their active counterparts by about a 2 to 1 ratio.
• Among fund families, Vanguard again dominated monthly inflows with nearly $14.8 billion and about $59 billion for the quarter. But inflows are finally slowing for the industry leader. This $59 billion is down from the $71.5 billion collected in 2016's first quarter and only about half the $116.5 billion collected in 2017's first quarter. Plus, this was the fourth consecutive quarter of declining inflows.

Download the complete Asset Flows Commentary here.