First, the depressing news: there has been outflows from equity mutual funds for 30 of the last 36 months, according to ConvergEx, which looked at data from the Investment Company Institute (ICI).
Here's the numbers on mutual fund flows for the last 3 years:
(August 2009 through August 2012)
Equity funds: $347 billion outflows
Fixed income: $775 billion inflows
Equity ETFs: $93.9 billion inflows
Source: ICI, ConvergEx, XTF
The $347 billion that has come out of stock funds is still a small part of the $5.6 trillion that is in equity mutual funds (6 percent) but the trend is clear: not only have investors taken money out of stock funds, but they have poured money into bond funds and, to a lesser extent, into equity ETFs.
We have talked many times about the reasons for the outflows. The financial crash of 2008 was the main reason: the accompanying loss in stock prices and real estate have made investors risk averse in both asset classes. An aging demographic is also a factor, as is the weak economy ("How can stocks hit new highs when the economy is so weak?"). Flash crashes don't help either.
What will convince investors to go back into the stock market? After all the S&P 500 is up 40 percent in the last three years...isn't that enough to get them back in?
No. Because investors, as ConvergEx noted this morning, have chosen asset classes that match their risk tolerance. And...to a great extent...those are bond funds.
And why not? They have been pouring money into high yield bond funds like the Barclays High Yield ETF, which is near a multiyear high and still has close to a 7 percent yield. What's not to like? Sure, they know (hopefully) that these junk bond funds can act more like stocks funds than bond funds during high volatility, but no one seems that worried.
They've been putting money into corporate ETFs as well, like the iShares Corporate Preferred, also near a new high, also with a juicy 5.8 percent yield.
Ah, you say, but why would anyone be in Treasuries? But look at the biggest iShares 20+ Treasury ETF, which consists of long-dated Treasurys with a 2.8 percent yield. It hit an HISTORIC HIGH five weeks ago, and even now is less than 5 percent off that high. No sign of any mass defections here, no surge of volume as people get out of this, or any other bond fund.
Not yet. My point is this: you will see money coming back into stocks when you see big losses in a broad class of bond funds. And that is not happening. Yet.
One final point: $93 billion in inflows into equity ETFs in the last three years. Many investors have simply become more comfortable with using ETFs, even though they are mostly unavailable in 401(k)s. (Read more: Cramer: ‘Most Company 401(k) Plans Stink’)
And why not? Look at the largest ETF in the world, the SPDR S&P 500, with $105 billion in assets. The expense ratio is 0.09 percent. You read that right: 0.09 percent. Why not just throw money in an index fund with a miniscule charge like that? Any wonder it's tough to charge heavy fees in mutual funds?
—By CNBC’s Bob Pisani
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