Tech Rally Garners Investor Interest in Select ETF Classifications

 | Jun 06, 2023 02:57AM ET

During the LSEG Lipper fund-flows week ended May 31, 2023, both the S&P 500 and the Nasdaq Composite finished at their highest levels since August 2022 after Nvidia (NASDAQ:NVDA) beat its Q1 earnings expectations, with the news lifting semiconductor issues and other technology-related companies on the day and as investors embraced reports that suggested Congress was close to a deal to raise the U.S. debt ceiling ahead of the Memorial Day three-day weekend.

The strong surge in mega-cap technology stocks has helped the Nasdaq composite post its strongest fund-flows week return since the week ended February 1. However, a continuation of the debt ceiling standoff, stubborn inflation, and rising interest rates continued to weigh on market participants and narrowed the leaderboard of top-performing U.S. stocks and sectors.

Of the often-followed U.S. indexes, the Nasdaq has been the rockstar of the group, posting an eye-popping 23.59% return year to date, while the S&P 500 returned 8.86% and the Dow Jones Industrial Average lost 0.72% for the same period.

The preliminary flows figures through the first five months of the year show that equity funds (including ETFs) have handed back a net $77.5 billion. At the same time—despite rising interest rates—inflation remains stubbornly high, and questions persist on whether the Federal Reserve is done with its tightening campaign, taxable fixed-income funds have taken in $63.0 billion. That said, municipal bond funds have handed back some $926 million year to date as investors wait cautiously to determine if the rising inflation and the possibility of recession might impact local municipalities’ ability to service their debt.

There appears to be a lot of pent-up demand sitting on the sidelines, with money market funds attracting the largest flows of net new money so far this year of the major asset classes, taking in $495.6 billion, their largest net inflows of any full year since 2020.

On the equity side, investors embraced some of the deeply out-of-favor macro-classifications of 2022, injecting the largest amount of net new money so far this year into international funds (+$20.5 billion, including conventional funds and ETFs), followed by sector-technology funds (+$6.6 billion) and the commodity and materials heavy sector-other funds (+$3.2 billion) macro-classifications. At the other end of the spectrum, investors gave the cold shoulder to large-cap funds (-$39.4 billion), mid-cap funds (-$14.2 billion), and global equity funds (-$12.7 billion).