George Smith | Portfolio Strategist

Last Updated: 

Additional content provided by Kent Cullinane, Analyst.

With 2023 behind us, we conducted a deeper dive into fund flows in December. Flows measure the net movement of cash into and out of investment vehicles, such as mutual funds and exchange-traded funds (ETF). We analyzed flows to gain insight into investor demand and sentiment surrounding asset classes, sectors, and other classifications of markets.

Asset Class Flows

During December, U.S. equities experienced the highest net inflow among major asset classes, with a net inflow of approximately $46 billion (represented by the light blue line in the below chart), over double the November inflow. While the last two months had significant inflows into U.S. equities, flows for the whole of 2023 were still negative, with a net $15 billion outflow. Within U.S. equity flows in December, there continued to be very strong investor appetite for ETFs (mainly passive vehicles) and continued selling of mutual funds (mainly active products). This trend of net outflows from mutual funds was seen across almost all asset classes. Taxable bonds realized the second-largest inflow in December at $21 billion, with both ETFs and mutual funds experiencing net positive inflows. Taxable bonds were also the top asset class by inflows over 2023, bringing in $220 billion. It is worth noting that money market products that are not included in the below chart, brought in $27 billion during the month and nearly $1 trillion throughout 2023.

Continued Shift Out of Mutual Funds into ETFs

Trailing 1-Month Net Asset Flows Across Asset Classes (AUM*, Billions $)

Bar chart depicting trailing one-month net asset flows across asset classes in billions of dollars as described in the preceding paragraph.

* Assets under management
Source: LPL Research 01/11/24
Disclosures: Past performance is no guarantee of future results.

Morningstar Category Flows

When looking at the more granular Morningstar category data (again excluding money markets), large blend equities experienced the largest net inflow in December, around $49 billion, more than doubling the November inflow of $23 billion. Large blend equities also outpaced all other categories over 2023, gathering nearly $145 billion in assets. Intermediate core bonds had an inflow of $14 billion and small blend equities had inflows of nearly $10 billion, up from $2 billion in November. Given the rally in small cap stocks toward the end of the year, it makes sense that inflows into this asset class have seen a large relative pickup.

Large growth equity funds saw the largest outflow at $29 billion, perhaps highlighting investor preference to lock in gains following a strong year for the asset class or to take some risk off the table. Ultrashort bonds and short-term bonds saw the largest outflows, close to $47 billion total, as investors move out of shorter interest rate sensitivity (duration) assets and into more interest rate sensitive products, such as intermediate core bonds. This move aligns with the flows over 2023, as longer duration categories, such as intermediate core bonds, intermediate core-plus bonds, and intermediate government bonds, made up three of the top six categories in terms of annual inflows.

Investors Trim Exposure to Short Bonds

Trailing 1-Month Net Asset Flows Across Morningstar Categories (AUM, Billions $)

Bar chart depicting trailing one-month net asset flows across Morningstar categories in billions of dollars as described in the preceding paragraph.

Source: LPL Research 01/12/24
Disclosures: Past performance is no guarantee of future results.

Sector Flows

Looking at sector flows over December, cyclical sectors like technology and financials outpaced all other sectors, with both mutual funds and ETFs gaining a little over $2 billion in flows over the month. Technology was also one of the few sectors that saw positive inflows over 2023, with ETF inflows outweighing mutual fund outflows, for a net $6 billion flow. Health care was by far the biggest laggard over December, and all of 2023, as the sector had net $4 billion and $25 billion outflows, respectively. Other defensive industries, such as consumer defensive and utilities, also lost assets across both time periods.

Cyclical Sectors Gain, While Defensives Lag

Trailing 1-Month Net Asset Flows Across Sectors (AUM, Billions $)

Bar chart depicting trailing one-month net asset flows across Morningstar sectors in billions of dollars as described in the preceding paragraph.

Source: LPL Research 01/12/24
Disclosures: Past performance is no guarantee of future results.

When comparing the latest LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) views with the December (and year-to-date) flows data, there are several places these align. The top asset class by inflows is U.S. equities, with large cap blend equities outpacing their small and mid (SMID)-cap peers. The STAAC maintains an overweight to large cap equities over SMID, given continued economic uncertainty and positive technical trends for large caps. Additionally, December flows highlight investor demand for higher-interest rate sensitivity asset classes is increasing. While the STAAC maintains a neutral duration (interest rate sensitivity) stance, the Committee favors fixed income broadly over cash, as the risk-return trade-off for bonds is attractive relative to history and reinvestment risk remains for cash.