As the third quarter progressed, American investors flocked to the safety of low-risk investments amid wild swings in the stock and bond markets.
As per the investment flow data that YCharts and Morningstar carefully analyzed and deciphered, money market funds emerged as the main attraction for investors, attracting a whopping $184 billion in net inflows in the third quarter. Compared to the second-highest category, intermediate core bond funds, which garnered relatively little attention, this spike in interest was almost ten times greater.
Bond mutual funds and exchange-traded funds (ETFs) garnered net inflows of $34.7 billion in the wider investment space, providing a stable haven for cautious investors. Regretfully, net outflows were recorded for the remaining fund categories; the largest impact was felt by equity funds, which recorded net redemptions of $17.6 billion.
In the midst of the market's ups and downs, something amazing has happened: cash has become the clear winner. This move to cash, small inflows into bond funds, and a flight from stocks were reflected in the S&P 500 Index's 3.6% quarterly decline.
In the financial sphere, bond yields kept rising, which are inversely correlated with bond prices. The yield on the benchmark 10-year U.S. Treasury increased by a whopping 73 basis points to 4.57%.
Cash consolidated its position as the preferred asset class as these market dynamics materialized. With the first interest rate increases in almost 20 years and the Federal Reserve's unwavering opposition to inflation, cash accounts are now more appealing than ever. Unprecedented highs have been reached by money market rates; in October, the top U.S. rate hit an annual 5.5%.
Cash is particularly alluring because it is less risky and volatile than the stock market, which can be quite volatile. Even before the third quarter, investors were quick to notice this change.
Net inflows into money market funds have increased dramatically over the last 12 months, reaching a remarkable $876 billion in total. Money market options are even more appealing because of the turmoil in the banking industry earlier this year, which led some depositors to look for safety there.
Funds for Equity Leak Assets
The allure of stock investments faced more competition as interest rates rose steadily, which resulted in net withdrawals from equity funds and ETFs during the quarter.
Specifically, net outflows totaling $11.8 billion were reported by U.S. stock funds and ETFs, which span Morningstar's nine primary equity categories and include a range of market capitalization sizes and investment styles.
Importantly, these categories' U.S. equity products would have seen net redemptions exceeding $50 billion if not for the significant $42.1 billion in net inflows into large-cap blend equity ETFs. After money market funds, this category saw the highest inflows by a wide margin.
There were continuous withdrawals of $60 billion from actively managed large-cap growth, value, and blend mutual funds. The fact that this trend has persisted for a number of years indicates that investors who favor passive ETFs are cost-conscious. Over the course of the last year, an incredible $225 billion has been lost from these three mutual fund categories combined.
- A dramatic shift in investor interest was witnessed in the third quarter, as money market funds secured a healthy $184 billion in net inflows, more than ten times the amount received by intermediate core bond funds, the next category down.
- The Federal Reserve's aggressive approach to combating inflation, which resulted in a number of interest rate hikes, is directly responsible for this increase in the popularity of money market funds. In turn, these increases have boosted the allure of low-risk money market investment options.
- The stock market has become much more competitive as interest rates rise, which has resulted in net withdrawals from equity funds and exchange-traded funds (ETFs) during the quarter.