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A: First, I do not think it is possible the Fed is directing QE3 money (or any money from QE1 and QE2 for that matter) to equities. There are too many intermediaries along the way who could "spill the beans" if in fact this was being done. Bernanke, of course, has stated that he wants to use monetary policy to reflate asset prices (i.e. stock and home values), so the Fed is indirectly driving money to equities by holding down interest rates and encouraging more risk taking.
In terms of where the money is coming from that is flowing into equities, there is no clear-cut answer, although ICI data suggest retail and institutional investors are still contributing.
As you alluded to, ETFs are getting more of the equity money than mutual funds these days. The net cash flow out of equity funds I think gets hyped in the press without adequate perspective.
First, we know from the Investment Company Institute (ICI) that net assets in equity funds totaled $5.762 tln as of the end of August. Stock funds saw an outflow of $19.2 bln in August, or roughly 0.3% of total net assets. On a year-to-date basis, there has been roughly (-$59 bln) in net new cash flow, or about 1.0% of total net assets. Domestic equity funds are responsible for that, with (-$77 bln) in net new cash flow or roughly 1.4% of total net assets.
The latest data from ICI also shows that liquid assets as a percentage of total net assets for all equity funds are 4.0%, which equates to $231 bln. On a percentage basis, that is below the 20-year average of 5.3%, but it does show a capacity to meet redemption requests with cash on hand versus needing to sell stock holdings outright.
The latter point notwithstanding, ICI data also show that common stock purchases by all equity funds outpaced common stock sales by an average of $1.66 bln per month from April 2009 to August 2012, although sales have been stronger over the last year.
Over the same period, the level of liquid assets as a percentage of total net assets for all equity funds has increased by $50 bln.
It is difficult to pinpoint the specific source that is putting cash into equities, although declining volumes would suggest retail investors are not the driving force.
My opining admittedly revolves more around the idea of how the market can be up with all of the outflows reported from equity funds. In any event, I hope it is a helpful perspective.
Patrick J. O'Hare
Chief Market Analyst