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2019 is on track to be one of the best years in decades for the stock market, yet investors have pulled billions of dollars out of equity funds. Mutual and exchange-traded funds saw outflows of about $2.9 billion in November, bringing the cumulative total for the year so far to $38.9 billion.
That data point comes from Morningstar’s November fund flow report. As the data provider points out, it’s likely that strong returns in 2019 — a 27.6% gain for the S&P 500 SPX, -0.04% for the first 11 months of the year — caused target-date funds to sell even as markets were rallying, just to keep their holdings aligned to their stated percentage weightings.
“This countercyclical dynamic had the opposite impact during 2018’s fourth-quarter correction,” Morningstar noted. “Despite the S&P 500 falling 13.5% during the quarter, U.S. equity funds had $61.4 billion in inflows. It is possible that investors have collectively developed nerves of steel, but it is more likely that target-date funds and other types of managed portfolios are having an impact on fund flows.”
Related: Is it time for ETFs to get active?
There’s been a lot of consternation among some market-watchers about the rise of “passively managed” financial products like ETFs. If something spooks investors, the theory goes, panic selling of the big funds like those that track the S&P 500 SPY, +0.00% could accelerate selling of the stocks those funds hold the most.
But there’s less attention paid to the automatic decisions programmed into financial vehicles like target-date funds that must rebalance according to predetermined weightings.
Of course, even if some target-date investors sat out a portion of the big rally in 2019, they may have previously benefited, by buying stocks at a discount in 2018’s selloff. Sometimes it can be a bonus to have a machine in charge, when normal instincts may lead human investors astray.
See: Three fund managers may soon control nearly half of all corporate voting power, researchers warn
