Mutual funds grabbed stocks as market tanked in December

U.S. mutual fund investors definitely got a scare in December as stocks experienced some of the biggest swings on record, but it appears that smart money used the dip to buy more equities, according to a new report from Morningstar.

U.S. equity funds were the only major category to see inflows during the month with Vanguard’s Total Stock Market Index raking in $14.1 billion, the most in 10 years, even as the Dow Jones Industrial Average and the S&P 500 slid 9 percent – the worst month since 1931. In total, passive funds snapped up $60 billion of inflows during the month, while active funds saw a record $143 billion taken off the table.

“The irony there, for the equity side, you saw rebalancing,” likely driven by target funds and model portfolios, according to Kevin McDevitt, senior analyst at Morningstar. While you might think the raging sell-off would have driven mutual fund buyers away, it likely did the opposite as passive funds recalibrate to maintain set asset allocation levels.

Third AG Marketing’s Chris Robinson made this interesting observation: The Christmas Eve 653-point sell-off for the Dow was followed by a 1,086 point rebound, the largest single-day gain ever for the Dow. The 1.3 percent jump was also matched by the S&P 500.

“The day after Christmas, when the world was coming to an end, that was the best time to buy the S&P,” he told FOX Business. Over the past four weeks the Dow and S&P 500 have jumped 10 percent, as tracked by Dow Jones Market Data Group. That was the best four-week stretch since October of 2011.

As stock funds were building assets, bonds and credit-oriented funds took a beat down last month.


“Bonds saw the most risk aversion,” McDevitt added. “People leaving as the Fed raises was a flight from risk.”

Taxable-bond funds, along with Intermediate-term bond funds, lost $43 billion and $17 billion in outflows respectively, according to the firm, the worst year since 2013. There were also significant outflows from high-yield, bank loan and corporate bond funds, McDevitt noted.

Three fund giants fared well in the collecting category during the month. iShares led with $36 billion of inflows, Vanguard followed with $11 billion and Fidelity with $2.6 billion. The Boston-based fund giant, which spawned many star active fund managers over the years, including Peter Lynch, has started to add more “passive” options, according to Morningstar.

The move mirrors the strategy that put Vanguard on the map by founder Jack Bogle, who died at age 89 this week. Bogle is considered a fund legend having created the world's first index mutual fund back in 1975. The revolutionary investment vehicle has saved investors millions in fees and created an industry now worth trillions.

Another investing legend, Warren Buffett, is a known fan of the Vanguard 500 Index. 

Suzanne O'Halloran is Managing Editor of and is a graduate of Boston College. Follow her on Twitter @suzohalloran