Extreme Selling Punishes Mutual Money as Investors Purchase ETFs

Investors are pulling money from U.S. equity mutual funds as fast as they can as the stock-market decline accelerates. They're buying government bonds, boosting savings as well as, amazingly, moving into exchange traded money.

"Extreme selling" by individual investors has caused $94.7 billion in redemptions from U.S. stock mutual funds in the four months through September, investment-research fast TrimTabs said. For all of 2008, which hosted the financial meltdown, economic recession as well as stock-market crash, outflows totaled $162 billion.

The wholesale dumping of U.S. equity mutual money underscores investors' aversion to the stock market's wild volatility. The Dow Jones Industrial Average has had intraday swings of more than 300 points in 20 trading sessions since Aug. 1. A latest survey by Natixis International Asset Management found 47% of U.S. investors are worried about losing revenue due to volatility.

The selling isn't contained to U.S. stock funds. Investors additionally pulled $9 billion from global funds from the begin of June till the end of August, which TrimTabs researchers say is the heaviest bleeding in 2 1/2 years. Less than two weeks into this month, October's outflows from global funds total $1.3 billion already.

"Mother and pop are extremely disgusted with international stocks," with "performance probably partly to blame," TrimTabs researchers write in their report released late Wednesday. International money have slumped 15.4% this year, over the 9.6% drop of the average domestic fund.

Morningstar analysts report similar findings, saying September had $6.9 billion flowing out of U.S. stock mutual funds.

So where's the income going? Morningstar notes that $90 billion has flowed into long-term mutual funds this year as $160 billion has flowed from money market funds. That leaves $70 billion unaccounted for, as well as builds on a difference of $216 billion from all of 2010.

"With cash continuing to flow out of income market money, a small proportion flowing into long-term mutual funds, and bank-deposit growth slowing, it's possible that investors are now utilizing money that utilized to go into savings for consumption," Morningstar Editorial Director Kevin McDevitt writes in today's research note.

TrimTabs analysts have a different take. They claim that investors are dumping actively managed mutual funds for ETFs, that are easier to trade as well as offer better tax advantages. As currently constructed, ETFs are subject just to capital-gains taxes when they're sold. Mutual funds, on the other hand, get hit with capital-gains taxes when assets in the fund are sold.


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