Year-End Stock Market Rally Didn’t Temper Enthusiasm for Cash Investments

Key Takeaways

  • Money market funds led all categories in fourth-quarter net inflows, concluding a year in which they attracted almost $1 trillion in additional assets.
  • Bond investors continued to pursue opportunities to extend duration for increased yield.
  • Assets continued shifting to exchange-traded funds from actively managed large U.S. stock funds in the latest quarter.

The U.S. stock market’s late 2023 rally didn’t prevent investors from stashing more cash in money market funds.

Even as the Standard & Poor’s 500 Index surged nearly 12% in the fourth quarter, money market funds led all categories of mutual and exchange-traded funds (ETFs) with $188.92 billion in net inflows during the period. In a year in which rising interest rates pushed money market yields to their highest level since 2001, money market funds attracted just shy of $1 trillion ($970.82 billion) in additional assets in 2023.

ETFs tracking broad-market, large-capitalization stock indexes—such as the S&P 500— drew $109.23 billion in net inflows (which equals new investments minus redemptions) during the fourth quarter, far and away the second-most of any fund or ETF category. They concluded the year with $212.35 billion in net inflows.

Bond Investors Extend Duration

Core investment-grade bond mutual funds and ETFs with intermediate sensitivity to interest rate changes (duration) had $23.92 billion in net inflows during the quarter—$14.68 billion from ETFs and $9.24 billion from mutual funds.

It appears bond investors continued extending their duration for higher yield opportunities, as short-term bond mutual funds had $14.01 billion in net outflows in the quarter. For the year, intermediate core bond mutual funds and ETFs together had $124.7 billion in net inflows, whereas short-term bond mutual funds had $46.19 billion in net outflows.

Shift to Passive from Active Persists

Actively managed mutual funds invested in large-cap U.S. stocks continued leading all categories in net outflows as investors continued shifting assets to lower-cost ETFs.

Active domestic large growth, large value and large blend mutual funds had a combined $69.05 billion in net outflows during the latest quarter, pushing their 2023 outflows to $225.63 billion. Those active categories lost assets despite respective robust gains of 13.8%, 9.7%, and 11.2% for the quarter and 36.3%, 11.5%, and 22.3% for the year.

Active foreign large growth funds had $9.2 billion of fourth-quarter net outflows, pushing 2023 net outflows to $26.98 billion.

Conversely, small blend, foreign large blend and large value ETF categories each had $7.65 billion to $13.88 billion in net inflows in the quarter, with each ranking among the top five ETF categories for new investment.

The inflows into large value ETFs reversed repeated outflows throughout most of 2023, as the market leadership provided by large, growth-oriented technology stocks moderated and broadened during the fourth quarter.