Investors pulled money from U.S. stock mutual funds and added to bond funds in April as the stock market had its first losing month of the year. But investors were clearly willing to take on some risk, as funds investing in foreign stocks attracted new cash.
Investors withdrew a net $5.7 billion from U.S. stock funds in April, industry consultant Strategic Insight said on Thursday. Year-to-date, investors have pulled out a net $6 billion. That’s even though the Standard & Poor’s 500 index returned nearly 13 percent in the first three months of the year, including dividends.
The pattern of withdrawals persisted in April, however, as stocks fell slightly, losing 0.6 percent.
A majority of first-quarter corporate earnings reports were better than expected. But investors have had to weigh that against recently disappointing news about U.S. job growth, along with indications that recessions in many European countries could be deep.
Avi Nachmany, research director with New York-based Strategic Insight, said investors appear to be stuck in a holding pattern.
“The fragile state of investor confidence will benefit bond fund inflows in the near future,” Nachmany said.
Bond funds attracted nearly $22 billion in April, the eighth consecutive month that deposits have exceeded withdrawals. That suggests investors remain nervous about stock volatility more than three years after the market hit bottom in the Great Recession.
Investors deposited a net $10.4 billion into funds investing in foreign stocks. It was the biggest monthly flow into that category since March 2011, when international stock funds attracted $10.5 billion.
Those funds also attracted new cash in each of the first three months of the year, as fears that the European debt crisis would spin out of control eased. However, new worries have emerged after voters in France and Greece last weekend gave strong support to political parties that want to roll back or slow down spending cuts.
Here are additional details about how investors moved their money in April, according to Strategic Insight:
— Bond funds: April’s net deposits of $21.8 billion into bond funds came almost entirely from taxable bond funds. Those funds, which primarily invest in corporate bonds, attracted a net $21.2 billion. An additional $600 million was deposited into municipal bond funds, which invest in bonds issued by state and local governments. Through the first four months of the year, taxable bond funds have attracted a net of about $104 billion in cash, far ahead of the $59 billion during the same period in 2011.
— Money-market funds: A net $22 billion was withdrawn from these funds in April, about one-third of the $69 billion total that flowed out in March. Money-market funds are designed to be safe harbors where investors can temporarily park cash and quickly access it when needed. However, their appeal has been reduced because returns have been barely above zero — they’re now averaging 0.03 percent — for about three years. Money fund returns are closely tied to interest rates. Prospects of higher returns dimmed in January when the Federal Reserve said it doesn’t expect to raise its benchmark rate until late 2014, at the earliest, because the economic recovery remains fragile.
— Exchange-traded funds: Investors deposited a net $3 billion into ETFs, which bundle together investments in a particular market index. Bond ETFs attracted $5 billion in new cash, while a net $2.5 billion flowed out of stock ETFs. Over the first four months of the year, net deposits into all ETFs total $58 billion, putting ETFs on track to record a sixth consecutive year of attracting more than $100 billion in new cash. Unlike mutual funds, ETFs can be traded during daily sessions just like stocks. ETFs continue to grow much faster than mutual funds, with net deposits totaling $115 billion last year.