The latest client fund flow data from Bank of America (BAC) shows that a relatively obvious reallocation of funds is taking place within U.S. equities. On the one hand, institutional investors and hedge funds have returned to the market in a big way, pushing overall U.S. equity fund inflows to a historically high level. On the other hand, funds are not chasing risk across the board. Instead, they are concentrated in large-cap stocks, mid-cap stocks and growth sectors such as technology, while continuing to avoid small-cap stocks and withdrawing from the previously crowded industrial sector. Particularly noteworthy is that private clients sold for a sixth consecutive week, while institutions and hedge funds bought aggressively, indicating that different types of investors are becoming increasingly divided in their attitudes toward the current U.S. equity market.
Data shows that Bank of America clients net bought about $3.9 billion of individual stocks last week, while also net buying about $3.1 billion of equity ETFs, for total inflows of about $7 billion. Over the same period, the S&P 500 rose only 0.1%, meaning that the large-scale buying did not occur against the backdrop of a clear market rally.
By investor type, institutional clients and hedge funds became the main drivers of this round of inflows. It is worth noting that this round of buying came mainly from institutional investors and hedge funds, while private clients have net sold U.S. equities for a sixth consecutive week. At the same time, funds shifted back toward growth sectors such as technology, showing that the risk appetite of large professional investors is recovering.
Fund flows among stocks of different market capitalizations also showed clear divergence. Bank of America clients mainly bought large-cap and mid-cap stocks, while continuing to sell small-cap stocks, indicating that although investors are increasing their U.S. equity exposure, they still prefer larger companies with relatively stable liquidity and fundamentals. At the sector level, the trend of funds flowing back into growth assets is especially obvious. Last week, Bank of America clients net bought individual stocks in 8 of the 11 main U.S. equity sectors, with the technology sector receiving inflows for a second consecutive week. The four-week rolling average flow into technology stocks has remained positive since mid-July, showing that allocation to the technology sector is continuing to improve. At the same time, the communication services sector also saw its first net inflow in five weeks.
In sharp contrast, the industrial sector has been the opposite. Bank of America clients have net sold industrial stocks for a fifth consecutive week, and last week the industrial sector posted the largest outflow among all industries. Bank of America pointed out that industrials had already become a sector with elevated valuations and relatively crowded trading. In the previous week, the sector’s four-week rolling average outflow even set a historical record, indicating that investors are retreating from previously high industrial positions. Consumer-related sectors were another major area of outflows, reversing the net buying trend of the previous week.
The ETF market also sent signals that funds are shifting back toward growth style. Last week, clients bought value, growth and blended style ETFs at the same time, with growth ETFs seeing their first net buying in five weeks. By market cap style, large-cap, mid-cap and broad-market ETFs all received inflows, while small-cap ETFs continued to be sold. However, the technology sector showed a noteworthy divergence between the individual stock and ETF markets. Although clients aggressively net bought technology individual stocks, technology ETFs instead became the industry ETFs with the largest outflows. At the same time, among the 11 sector ETFs, 7 saw net buying by clients, with healthcare ETFs posting the largest inflows.
