Investors swarmed US stock ETFs as fiscal deal reached: Lipper

NEW YORK Thu Jan 3, 2013 6:58pm EST

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NEW YORK (Reuters) - Investors in U.S.-based funds pumped $7.17 billion into stock exchange-traded funds in the latest week while pulling money out of bond funds as U.S. lawmakers struck a deal to avert the "fiscal cliff" of tax hikes and spending cuts, data from Thomson Reuters' Lipper service showed on Thursday.

The flood of cash into stock ETFs in the week ended January 2 is the most in three weeks, and offset outflows of $3.48 billion from stock mutual funds.

The combination of inflows into stock ETFs and outflows from stock mutual funds resulted in net inflows of $3.7 billion into stock funds overall for the week.

Bond funds, meanwhile, started the year with net outflows of $330.2 million as investors withdrew $412.7 million from bond ETFs and committed just $82.5 million to bond mutual funds.

Bond funds were largely favored in 2012 for their stable returns and safety relative to stock funds, and suffered outflows in just five reporting weeks throughout the year.

ETFs are generally believed to represent the investment behavior of institutional investors, while mutual funds are thought to represent the retail investor.

"Institutional investors had a better feeling that an agreement would be reached before the deadline and therefore anticipated a bump up in the markets," said Jeff Tjornehoj, head of Americas Research at Lipper.

The benchmark S&P 500 stock index rose 3 percent over the reporting period, with markets surging after U.S. President Barack Obama and Congress reached a deal to prevent the looming "fiscal cliff" of $600 billion in tax increases and spending cuts that threatened to tip the U.S. economy into a recession.

The last-minute deal reached on Tuesday included an income tax increase on families earning more than $450,000 per year and limits on the amount of deductions they can take to lower their tax bill. Not all issues were resolved, however, and spending cuts of $109 billion in military and domestic programs were delayed for just two months.

Institutional investors put $3.8 billion into the SPDR S&P 500 ETF, but also ventured outside the U.S. and gave $2.7 billion to international stock ETFs. Emerging markets were a bright spot as $944 million in new cash flowed into the iShares:MSCI Emerging Market fund.

The flows into emerging market ETFs may have been opportunistic, said Tjornehoj of Lipper, as investors might have anticipated that a budget deal in the U.S. could send emerging market stocks higher.

With regard to bond ETFs, the outflows of $412.7 million from showed modest improvement from the prior week, when investors pulled $872.2 million from the funds.

Retail investors in particular soured on high-yield bond mutual funds and withdrew $281.8 million, while institutional investors pulled $190.9 million out of high-yield bond ETFs.

"There's a sense that, if equities are turning the corner, why hold the proxy" said Tjornehoj of Lipper on investors' flight from high-yield corporate bonds, which are seen by some as a safer, debt version of stocks.

The weekly Lipper fund flow data is compiled from reports issued by U.S.-domiciled mutual funds and exchange-traded funds.

(Reporting by Sam Forgione; Editing by David Gregorio)

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