Month after month, it seems the same for small investors — they are dumping mutual funds that specialize in U.S. stocks.
We aren’t talking small amounts either. The dollar amounts are huge. But for anyone with the stomach to hold tight with their investments, the trend is actually a bullish sign.
Tens of billions of dollars flee. Through April 30, investors withdrew $197 billion from mutual funds that specialize in U.S. stocks, according to monthly data from the Investment Company Institute, which tracks fund flows. And weekly reports filed from May 1 to June 8 record another $24 billion in outflows.
Those are huge numbers, considering that all of 2014 saw $60 billion of net outflows from similar funds.
Retail investors hold around 95 percent of the money in long-term mutual funds, which includes both bonds and stocks.
[See: 11 Ways President Trump’s Tax Plan Could Affect Americans.]
The last time there was an inflow into domestic stock funds was February 2015. So to sum it up simply: Retail investors really seem to hate U.S. stock funds.
What does it mean? “The data that we have been looking at for a long time show that retail flows are contrary indicators,” says Stephen Wood, chief market strategist at Russell Investments in New York. “By and large, they enter and exit the market at the most inopportune times.”
Small investors time the market badly. They sell when they should be buying, and buy when they should be selling.
Consistent selling for a long time by small investors should be a good sign for the Standard & Poor’s 500 index and other key indices. It would also be good for investors holding funds that track those indices, such as the SPDR S&P 500 exchange-traded fund (ticker: SPY).
The behavior of small investors poorly timing their buys and sells in the market “is pretty consistent,” Wood says.
Emotions rule small investors. A big contributing factor to this behavior is the way small investors react to events in the news, some of which can be alarming.
“There is definitely fear of the unknown and the prospect of interest rates going up, and the unusual presidential election,” says Eric Marshall, president and portfolio manager at Dallas-based Hodges Capital. He also helps manage the Hodges Small Cap Retail Fund ( HDPSX).
“It has caused a lot of small investors to back away,” he says.
But backing away from the market isn’t necessarily true of so-called institutional investors, like those who manage money professionally on Wall Street.
That’s an important factor because the specter of rising interest rates and a presidential election featuring two unpopular major party candidates will undoubtedly unsettle many people. But that is where professional investors behave differently than small investors.
[See: 11 Stocks That Donald Trump Loves.]
Wall Street pros might have feelings of ambivalence about events they hear in the news, but that doesn’t mean they let it affect their investing decisions. The pros may be more likely to use bad news, and resulting lower stock prices, as an opportunity to buy at a better price.
The ETF caveat. So is the mutual fund data a sure-fire way to predict? On Wall Street, nothing is certain.
One thing that is different is the growing adoption of exchange-traded funds by investors overall, as well as the popularity of mutual funds that track indexes rather than ones that are actively managed by professionals who pick stocks, according to a recent report by the ICI.
So at least some of the money fleeing U.S. domestic stock funds may be finding its way back into the market via domestic equity ETFs.
“ETFs could certainly be a component of it,” Wood says.
Whether all of the outflow from mutual funds is coming back in through ETFs is an entirely different matter though, which seems unlikely.
First, many households invest solely through their company-sponsored 401(k) plans, where mutual funds are the norm. And relatively few U.S. households (5 percent) owned ETFs as of mid-2015, according to a recent ICI report. While that may have changed, it seems unlikely that there would be a radical change in the space of 12 months.
At least for the time being, the contrary connection between what mutual fund investors do and how the market performs leaves at least some professionals very confident in the market.
[See: 8 Soaring Stocks That Suffered the Big Bounce.]
“In the land of the contrarian, signs like this tend to be very, very bullish,” says Scott Colyer, CEO and chief investment officer at financial services firm Advisors Asset Management in Monument, Colorado.
More from U.S. News
The 10 Best Materials ETFs We Could Dig Up
9 Ways to Harness the Growth of Latin America
The 9 Best Investors of All Time
Individual Investors Are Dumping U.S. Stocks, Which Means It’s Time to Buy originally appeared on usnews.com
