Investors withdraw from US stock funds in May

BOSTON —Investors continue to be cautious with their money. May was the third consecutive month that they’ve withdrawn more cash from U.S. stock mutual funds than they deposited into them. Bond funds attracted new cash for the ninth month in a row.

Investors withdrew a net $4.8 billion from U.S. stock funds last month, industry consultant Strategic Insight said on Tuesday. Stock funds attracted cash in January and February, but not enough to offset the total that flowed out the past three months. Year-to-date, net withdrawals total $7.4 billion.

Last month’s retreat from stock funds came as major market indexes declined, and the average U.S. stock fund lost 4.2 percent, Strategic Insight said. Investors grappled with the widening debt crisis in Europe, weaker readings about the U.S. economy and Facebook’s disappointing initial public offering.

“U.S. investors’ psyches have been battered with a stream of negative news, whether disappointments in job growth or disappointing progress on the eurozone problems,” said Avi Nachmany, Strategic Insight’s research director.

He expects that investors will continue to favor bond funds over stock funds until there’s sustained job growth in the U.S. and progress in resolving Europe’s debt crisis.

But investors didn’t retreat from foreign markets last month, despite Europe’s troubles. U.S. funds investing in foreign stocks attracted $4.9 billion, However, the May total was down from the net $6.5 billion that was added to foreign stock funds in April. Year-to-date, foreign funds have attracted nearly $28 billion.

Here are additional details about how investors moved their money in May, according to Strategic Insight:

Bond funds: May’s net deposits of $14.3 billion into bond funds came mostly from taxable bond funds. Those funds, which primarily invest in corporate bonds, attracted a net $9.4 billion. An additional $4.9 billion was deposited into municipal bond funds. Through the first five months of the year, taxable bond funds have attracted a net of about $110 billion in cash, ahead of the $80 billion during the same period in 2011.

Money-market funds: A net $2 billion was withdrawn from these funds in May, down from $22 billion in April and $69 billion total that flowed out in March. Money-market funds are designed to be safe harbors where investors can temporarily park cash and quickly access it when needed. However, their appeal has been reduced because returns for the past three years have been barely above zero. Money fund returns are closely tied to interest rates. Prospects of higher returns dimmed in January when the Federal Reserve said it doesn’t expect to raise its benchmark rate until late 2014, at the earliest, because the economic recovery remains fragile.

Exchange-traded funds: Investors deposited a net $2 billion into ETFs, which bundle together investments in a particular market index. Bond ETFs attracted nearly $8 billion in new cash, while a net $6 billion flowed out of stock ETFs. Over the first five months of the year, net deposits into all ETFs total $60 billion, putting them on track to record a sixth consecutive year of attracting more than $100 billion in new cash. Unlike mutual funds, ETFs can be traded during daily sessions just like stocks.