American investors are confused about this economic recovery, according to monthly data from Morningstar Inc.

The proof that investors are more confident is that they have slowly started to reinvest. Morninstar [MORN] said that mutual funds raked in net new assets of $30.3 billion last month, while exchange-traded funds took $4.6 billion.

The U.S. ETF industry overall was up 67.9% from a year earlier, according to Morningstar. Sonya Morris, an editorial director for the company’s fund research group, warned against reading too much into the ETF inflows.

“You can short ETFs, so even though we know assets into ETFs went up, we don’t know precisely how much of that is someone being long or someone being short,” she said.

Mutual fund investors emphasized caution, pulling $3.7 billion from U.S. stock funds, making it the only major asset class to see outflows in February. That marks the fifth time the category has seen outflows in the last six months. Over the last 12 months, $21.3 billion has left the sector, according to Morningstar.

Some of those dollars went into safer fixed-income funds, underlining mutual fund investors’ worry regarding the stability of the economic recovery. Taxable bond funds took in $19.8 billion in February, once again led by Treasury inflation protected securities and short-term duration bonds.

The big story in bond funds lies within the PIMCO Total Return Fund, which now represents 27% of the world bond category, making it the largest mutual fund in the world, according to Morningstar.

Though the fund peaked in the fall, Morris said it shows no signs of slowing down. The fund is twice size of its two closest competitors — the Oppenheimer International Bond and the American Fund Capital World Bond - according to Morningstar.

The PIMCO Short-Term Bond Fund has also grown emphatically, taking in $6.1 billion over the last 12 months. With $10.6 billion in total net assets, the fund now accounts for a third of the assets in the ultra-short bond category, according to Morningstar.

But the story wasn’t all about running for safety. In fact, ETF investors, perhaps more confident in the economic recovery, moved into riskier funds.

While domestic U.S. stock mutual funds bled billions, their ETF counterparts added assets. The domestic stock category topped ETF inflows in February, raking in $4.8 billion. This was led by the SPDRs SPY ETF, which had $1.5 billion in net inflows, according to Morningstar.

However, Morris said that while monthly flows into U.S. stock ETFs are up, on a year-to-date basis this category has lost nearly $14 billion.

As investors put their faith — and their cash — in domestic stock ETFs, they pulled it from international stock ETFs. The category saw outflows of $2.9 billion last month, marking the sector’s first monthly outflow since August.

And the confusion doesn’t end there. Investors showed both frustration with the miniscule yields this low interest rate environment provides and concern over the rates’ inevitable rise.

Investors pulled $71.1 billion out of money market funds last month. Some of that money may have gone into just slightly riskier municipal bond funds, which took in more than $10 billion in the first two months of the year, making this year their strongest start ever in terms of assets, according to Morningstar.

Morris said this is part of a larger unwinding considering the number of investors that moved their money to super-safe investment vehicles in 2008 and early 2009. Investors, tired of miniscule money market yields, are looking for opportunities to profit.

The trend toward these slightly riskier bonds is concerning, Morris said. “If these investors are really concerned about principal preservation they may be disappointed if bond funds face challenges or face headwinds, should interest rates rise,” she said.

Some investors, however, are taking a bit more action against interest rates’ inevitable step up. Last month, short-term bonds took in $339.0 million, government short-term bonds $265.3 million and ultrashort-term bonds $155.9 million. Intermediate-term bond ETFs, meanwhile, saw net new assets of $422.6 million, while long-term government ETFs raked in $352.0 million.

While these funds won’t entirely protect investors from rising rates, Morris said, the impact will be less than long-term bond funds.


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