BOSTON -- Even as stock prices rose again in September, investors withdrew money from stock mutual funds at the fastest pace of the year, marking the seventh straight month that withdrawals have exceeded deposits.
Bond funds attracted cash for the 13th consecutive month, according to a report from the firm Strategic Insight, which also said Wednesday that investors showed a preference for exchange-traded funds over traditional mutual funds. The amount of net deposits that stock ETFs attracted last month was about double the total that was removed from stock mutual funds, suggesting that investors still saw value in stocks.
The Standard & Poor's 500 index rose more than 2 percent in September, ending the month up nearly 15 percent for the year. Despite those strong gains, the last month that investors added new cash to stock mutual funds was February.
It's further evidence of conservative investing trends dating to 2008, suggesting investors remain anxious about stock volatility and the economy four years after the financial crisis began. Investors are drawn to the income-producing potential and smoother returns that bonds typically generate.
"Insatiable demand for income and a lingering, semi-permanent state of investment anxiety continue to drive the choices for most mutual fund investors," said Avi Nachmany, research director with New York-based Strategic Insight.
He predicted that recent trends are likely to continue a few more months, although there could be a "slow rotation" to stock funds next year.
Here are details about how investors moved their money in September, according to Strategic Insight:
STOCK FUNDS: investors withdrew a net $16.3 billion from U.S. stock funds. That was this year's largest monthly flow out of stock funds, eclipsing the $11 billion during August. Year-to-date, net withdrawals from stock funds total $49 billion, with about two-thirds of that amount coming over the past three months.
An additional $1.1 billion was withdrawn in September month from funds investing primarily in foreign stocks. Year-to-date, international stock funds have attracted $32 billion in new cash.
BOND FUNDS: September's net deposits of $31.6 billion into bond funds came mostly from taxable bond funds. Those funds, which primarily invest in corporate bonds, attracted a net $27.8 billion. An additional $3.7 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 $240 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 September deposited a net $35.9 billion into ETFs, which bundle together investments in a particular market index. That includes $33.1 billion into stock ETFs _ about $26 billion into ETFs investing in U.S. stocks and $7 billion into foreign stock ETFs. Another $2.8 billion was added to ETFs investing in bonds. The stock ETF total for September was the largest monthly flow into that category in four years.
Over the first nine months of the year, net deposits into all ETFs total $129 billion. Unless withdrawals exceed deposits through December, ETFs will 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.
ETFs emerged in the 1990s and 2000s primarily as trading vehicles for institutional investors such as pension funds. Their low costs and index investing approach are drawing more individual investors. Strategic Insight estimates that individuals own about 60 percent of assets in ETFs, and account for a similar proportion of money flowing in and out in a given period. The remaining 40 percent is attributed to institutional investors.
MONEY-MARKET FUNDS: A net $5.5 billion was withdrawn from these funds in September. Year-to-date, a net $150 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 0.03 percent _ for about three years. Money fund returns are closely tied to interest rates. Prospects of higher returns dimmed in January when the Federal Reserve said it doesn't expect to raise its benchmark rate until late 2014, at the earliest, because the economic recovery remains fragile.