In the second quarter of 2024, inflows into money market funds and bond funds outpaced equity funds as investors sought income.
Investors continue to move into high-yield, well-performing bank loan funds, as well as equity funds that offer investors strong returns through option strategies. Here are five key investment trends for the second quarter.
Money market flows remain strong but far from 2023 peak
Investors poured $47 billion into money market funds in the second quarter, about three times as much as in the first quarter but just over one-tenth of the inflow explosion in the first quarter of 2023. At the time, the regional banking crisis roiled markets and sent investors flocking to the safety of money market funds. Interest in money market funds has been strong since then, with yields at their highest in years, often exceeding 5%, the report said.
Ultra-short-term bonds dominate
Investor interest in bond funds continues: Taxable bond funds attracted $87 billion in inflows, down from the $143 billion bonanza in the first quarter, but still outpacing the quarterly inflows bond funds have seen through all of 2023 and the outflows they experienced during 2022’s big bond bear market.
The standout area was ultra-short-term bond funds, which saw inflows of $19 billion. That was a big increase from outflows of $1.1 billion in the first quarter and the largest quarterly inflow since the second quarter of 2020. When interest rates rise, investors often gravitate toward ultra-short-term bond funds, which are defensive in nature. But the inflows into these funds, as well as money market funds, come as investors expect the Federal Reserve to start cutting interest rates in September, albeit more slowly than expected at the start of the second quarter. As with money market funds, the attraction is likely to be the high yields.
Another strong performer in the fixed income space was bank loan funds, which attracted $5 billion during the quarter, nearly double the $2.6 billion in the first quarter and the highest level since the first quarter of 2022. Bank loan funds have been some of the best performers in recent years, benefiting from the allure of high yields and a resilient economy in the face of aggressive Fed rate hikes.
Investors put more money into option income funds
Among equity funds, so-called covered call funds have become mainstream in popularity. They are part of Morningstar’s Derivatives Income category. These funds use options to generate income from a portfolio of stocks and other assets. The category includes the $34 billion blockbuster JPMorgan Equity Premium Income ETF JEPI, which brought in another $550 million in the second quarter. While it remains the largest fund in the category, another JPMorgan fund came out on top in the second quarter. Investors poured $2.9 billion into the JPMorgan Nasdaq Equity Premium Income ETF JEPQ, bringing its assets to $15.1 billion.
Overall, the category raised $7 billion, up 8.5% from the start of the quarter, a measure known as organic growth that gives a full picture of asset growth without the distortions of market performance. Over the past year, derivative income funds raised $24.4 billion, representing 38.7% organic growth and bringing the group’s assets to $90.7 billion.
Equity flows cool, but tech is hot
As stocks recovered from a soft start to the quarter, U.S. equity funds received $11 billion in inflows, down from $14 billion in the first quarter and $58 billion in the final three months of 2023. International equities held up a bit better, declining slightly to $8 billion from $10 billion in the first quarter. This was the smallest difference between quarterly U.S. and international equity inflows since 2018.
Investors pulled $9 billion from sector-specific equity funds, reverting to an outflow pattern for 2023 after encouraging positive inflows in the first quarter. But the money wasn’t evenly distributed. The biggest inflows came from sector-specific funds amid a rally in technology stocks, especially big names expected to benefit from the artificial intelligence boom. Technology equity funds saw inflows of $4.2 billion in the second quarter, down from $13 billion in the first quarter.
The T. Rowe exodus continues
Of the top 10 fund families, eight had positive inflows during the quarter, with the exception of T. Rowe Price ($11 billion in outflows) and American Funds ($22 billion in outflows). T. Rowe has not seen any quarterly new inflows since the beginning of 2017. Capital Group’s American Funds has not seen a quarterly inflow since 2022.
iShares led the way with $62 billion in quarterly inflows, followed by Vanguard with $36 billion. iShares also boasted the best organic growth rate among the large fund companies at 2.24%, slightly ahead of Invesco’s 2.18% growth. In the second quarter, Schwab was narrowly knocked out of the top organic growth spot for the second consecutive year.
