Are Retail Investors ‘Fleeing’ Stocks? – By Jason Zweig

Make no mistake: Individual investors are selling more U.S. stocks than they are buying, as my colleague Jack Hough pointed out this weekend. But it’s wrong to rely on mutual funds as the sole or primary indicator of retail flows into or out of U.S. stocks.

Many of the redemptions seem, instead, to be exchanges – from mutual funds to exchange-traded funds.

Financial advisers love ETFs, partly because they tend to be more predictable and tax-efficient than mutual funds, partly because the lower fees on ETFs remove some of the pressure that advisers might otherwise feel to cut their own fees. Naturally, financial advisers are counseling their clients to shift from mutual funds to ETFs.

So far this year, U.S. stock ETFs have taken in approximately $22.5 billion in net inflows.

When you add those net ETF inflows to the net outflows from U.S. stock mutual funds, the $68 billion in fund-flight cited by most of the commentariat drops to less than $46 billion.

Then consider that “balanced” mutual funds – those hybrid portfolios of stocks and bonds – have attracted more than $20 billion in net inflows so far this year.

According to Morningstar analyst Annette Larson, the average balanced mutual fund (weighted by the size of assets) has 57% of its portfolio in stocks.

That means that the inflows into balanced mutual funds are the equivalent of another $12 billion in equity purchases. That, in turn, would take the effective net outflows from U.S. stocks down to $34 billion.

Mind you, we’re not saying that $34 billion in outflows isn’t real money. But it’s half the number that the experts usually cite as evidence that small investors are fleeing U.S. stocks.

And if you throw in the net inflows that international stock portfolios — mutual funds and ETFs alike — have attracted so far this year, the overall net redemptions from stock funds shrink to just about zero.

Yes, people have been cutting their exposure to U.S. stocks for years. And yes, there are plenty of reasons, old and new, for retail investors to be furious at the stock market.

But, so far at least, retail isn’t abandoning the stock market wholesale.