As investors become more worried about the U.S. economy, they seem to be pouring more money into bond funds and international equity funds and less money into domestic equity funds and ETFs, according to Strategic Insight, a business intelligence provider to the worldwide fund industry.

On Monday Strategic Insight released data showing that US mutual fund investors put $24 billion in net new cash into US stock and bond open-end and closed-end mutual funds in May 2011. This was a slight decline from April’s $27 billion of net inflows to long-term funds, a signal that investors are worried over future economic growth.

Meanwhile, bond funds had net inflows of $20 billion in May, as an alternative to cash and as a low-risk way to invest. Through the first five months of the year, taxable bond funds raked in $79 billion in net inflows, a decline from $108 billion in net flows for the first five months of 2010. At the same time, US investors took out almost $3 billion in net new cash from domestic equity funds in May 2011, the first month of net outflows from US equity funds since December’s net outflows of $8.5 billion, noted Strategic Insight.

“Investors have still put net $39 billion into US equity funds through the first five months of the year. Net withdrawals from US equity funds were relatively modest in May, suggesting that setbacks in the recovery may cause dips in investors’ confidence,” achmany said. “We may see US equity funds experience volatile net flows in the near term, as investor confidence waxes and wanes.”

With fewer worries about municipal bond default rates, municipal bond funds seemed to have stabilized, with almost no net outflows. International and global equity funds had roughly $7 billion in net flows in May, surprising given the troubles in the Middle East and North Africa. Meanwhile, money-market funds had net outflows of $8 billion in May, an increase from the $6 billion in outflows in April.

“Signs of a lull in the US economy’s recovery damped investors’ fragile confidence and suggests that the Federal Reserve will keep interest rates near record lows through 2011,” said Avi Nachmany, SI’s Director of Research, in a press release. “If rate hikes are postponed until 2012, then 2011 will see ongoing demand for selected bond mutual fund strategies.”

US Exchange-Traded Funds also saw net outflows in May of roughly $6.5 billion, noted Strategic Insight, the first month of net outflows for ETFs after eight consecutive months of net inflows. Most of the net outflows were from US equity ETFs, with $10.5 billion in net outflows, compared with $11.3 billion in net inflows in April. Meanwhile, there were $2.5 billion in net inflows into bond ETFs.

At the end of May, US ETF assets were at $1.11 trillion, a slight decline from $1.13 trillion in April.

“Despite a pullback in May, US ETFs are still on pace to log their fifth straight year of $100 billion or more in net inflows,” said Loren Fox, senior research analyst at Strategic Insight. “This is a testament to the growing retail and institutional demand for ETFs.”


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