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(Bloomberg) — Stocks had a banner start to the year, but exchange-traded fund investors seemingly never got the memo.
Equity ETFs saw inflows of $27.4 billion in the first quarter, the lowest haul since the early days of the Covid-19 pandemic outbreak, according to data from Bloomberg Intelligence. That’s despite a 7% jump for the S&P 500 and a roughly 21% surge for the Nasdaq 100 during the three-month stretch.
Meanwhile, fixed income funds took in $44.6 billion in what was the fourth straight quarter of inflows greater than $40 billion.
“In a world where you can get 4.5% basically risk-free in a money market fund, stocks have lost some of their dominance over investors and now face legit competition from cash funds and Treasury ETFs,” said BI Senior ETF Analyst Eric Balchunas.
It was a roller-coaster quarter, according to Jane Edmondson, co-founder of EQM Indexes. Coming into January, investors piled into fixed income, with the hope that the Federal Reserve’s tightening cycle was near an end. Then inflation fears resurfaced in February and stocks tumbled, followed by the March banking crisis. The Fed kept raising rates despite the pressure on the financials sector as a handful of banks closed.
Equities still managed to come out ahead as investors looked past recessionary warning signals from multiple corners of the market. The S&P 500 wrapped it all up with back-to-back quarterly gains, something that hasn’t happened during any bear market in the past four decades.
“Investors were under-allocated to fixed income, so I think that is why equity flows were lower,” Edmondson said. “But going forward, we anticipate heightened flows to equities, and especially international.”
Yet, March’s solid showing for stocks revealed signs of a rougher ride underneath the surface, according to Gina Martin Adams, BI’s chief equity strategist. Investors favored defensive plays and gains were led by big-cap tech names in a rally that excluded smaller stocks with the Russell 2000 index falling 5% last month.
“Without small caps’ participation, stocks’ future is tenuous and likely highly contingent on an imminent Federal Reserve pause,” she wrote.
–With assistance from Sam Potter, Isabelle Lee and Lu Wang.
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