Mutual fund shareholders aren't budging from their recently conservative approach to investing, despite this year's stock market gains. Cash was pulled from stock funds for the eighth month in a row in October, while bond funds attracted cash for the 14th consecutive month.
Industry consultant Strategic Insight reported on Wednesday that a net $15.2 billion was withdrawn from U.S. stock funds last month.
Despite a modest decline last month, the Standard & Poor's 500 index was up 12 percent for the year through October. Bond fund returns averaged nearly 8 percent over the same period, and Strategic Insight estimated stock and bond fund assets have appreciated in value by more than $1 trillion this year to $8.8 trillion.
"So far, 2012 shapes up as one of the best years ever for wealth creation for mutual fund investors," said Avi Nachmany, research director with New York-based Strategic Insight.
Yet many fund investors haven't fully participated in the stock market's gains. The last month that deposits into U.S. stock funds exceeded withdrawals was in February. Year-to-date, net withdrawals total nearly $57 billion.
Bond funds are a more conservative investment option than stock funds, with less potential for sharp gains or losses. They have attracted new cash each month since September 2011, and last month's bond fund intake was $29.7 billion.
Here are more details about how investors moved their money in October, according to Strategic Insight:
STOCK FUNDS: Last month's net withdrawal total of $15.2 billion from U.S. stock funds was down from the $16.3 billion pulled out in September. That month's total was this year's largest monthly flow out of stock funds. Strategic Insight said investors appeared to remain cautious in October due to concerns about the Nov. 6 election, and related fears about potential tax increases and fiscal uncertainties. Funds primarily investing in foreign stocks nevertheless attracted cash last month, with $700 million in net deposits. Year-to-date, international stock funds have attracted $34 billion in new cash.
BOND FUNDS: October's net deposits of $29.7 billion into bond funds came mostly from taxable bond funds. Those funds, which primarily invest in corporate bonds, attracted a net $24.8 billion. An additional $4.9 billion was deposited into municipal bond funds, which invest in bonds issued by state and local governments.
Year-to-date, bond funds of all types have attracted $271 billion, putting them on pace to amass more than $300 billion in new cash this year. That would exceed the totals from 2011 and 2010. Strategic Insight says net deposits into bond funds exceed $1 trillion since the 2008 financial crisis.
EXCHANGE-TRADED FUNDS: Investors in October deposited a net $2.9 billion into ETFs, which bundle together investments in a particular market index. A net $8.4 billion was withdrawn from ETFs investing in U.S. stocks, while a net $6.6 billion was added to foreign stock ETFs. Another $4.7 billion was added to ETFs investing in bonds.
Over the first 10 months of the year, net deposits into all ETFs total nearly $138 billion. That puts 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. They continue to grow much faster than mutual funds. However, assets in mutual funds are still about 10 times larger than the total in ETFs.
MONEY-MARKET FUNDS: A net $8 billion was withdrawn from these funds in October. Year-to-date, a net $144 billion has been withdrawn. Money-market mutual funds are designed to be safe harbors where investors can temporarily park cash and quickly access it when needed. Yet their appeal has been reduced because returns have been barely above zero — they're now averaging 0.02 percent — for about three years. Money fund returns are closely tied to interest rates, which remain ultra-low because the economic recovery remains fragile.