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Commentary

Rate Cut Doesn't Spur Increase in Fund Flows

Long-term funds suffered $16 billion in outflows during August.

Note: This is an excerpt from the Morningstar Direct U.S. Asset Flows Commentary for August 2019. The full report can be downloaded here.

The Fed cut rates a quarter point in July. Such cuts have sometimes increased investors' risk appetite, but that didn't happen in August. Investors pulled a combined $15.9 billion from long-term open-end and exchange-traded funds for the month. Every major U.S. category group—except commodities—saw a decline in inflows or an increase in outflows compared with July. August's long-term outflows were the greatest since December 2018, when capital markets were enduring a nasty correction.

Money market funds were a likely beneficiary of August's long-term outflows with $80 billion in inflows, even though the Fed's rate cut will reduce the yield on such funds. This perhaps speaks to the level of investor trepidation. Nevertheless, August saw the group's second-greatest inflows in 2019. Money market funds have now collected $298.3 billion for the year to date, the greatest sum since 2008 when investors were in the depths of the credit crisis.

Passive U.S. equity assets passed active U.S. equity assets by about $25 billion. As a result, passive share of U.S. equity open-end and ETF assets is now 50.15% versus 49.85% for active funds.

This milestone has been a long time coming as the trend toward low-cost fund investing has gained momentum. Active U.S. equity funds have had outflows every year since 2006, with roughly equivalent inflows into passive funds during that time. Over the past 10 years, active U.S. equity funds have had $1.3 trillion in outflows and their passive counterparts nearly $1.4 trillion in inflows.

Other key takeaways:

  • Taxable-bond funds led the way with $16.3 billion in inflows, but this was the group's second-lowest total of the year. Credit-oriented high-yield and bank-loan funds had about $8.9 billion in combined outflows. Municipal-bond funds' inflows remained strong with $9.1 billion.
  • Commodities precious-metals funds had $4.7 billion in inflows, the most since February 2016. This surge might reflect investor fears of potential inflation following the Fed cut