Mutual fund investors are cautiously returning to the surging stock market, depositing more into stock funds than they're withdrawing for the second month in a row.
Investors added a net $3.6 billion into U.S. stock funds last month, industry consultant Strategic Insight said on Monday. Including January, stock funds have attracted $5 billion in new cash, a reversal from 2011. The last time investors added to stock funds for two months in a row was in March and April 2010. From May through December, withdrawals exceeded deposits each month.
However, bond funds continue to attract more cash than stock funds, suggesting investors remain nervous about stock volatility three years after the market hit bottom in the Great Recession. Last month, net deposits into bond funds totaled nearly $36 billion.
That's consistent with trends since the financial crisis, as fund investors have added to bond holdings while withdrawing from stocks _ even as stock prices doubled since March 2009.
The Standard & Poor's 500 index has gained more than 9 percent so far this year, after finishing 2011 virtually unchanged. This year's turnaround in stock fund flows suggests investor confidence may be rebounding.
"Memories of extreme volatility are fading, albeit very slowly, as U.S. mutual fund investors are tiptoeing back into riskier assets," said Avi Nachmany, research director with New York-based Strategic Insight.
To the extent that investors are returning to stocks, they're doing so cautiously. For example, about three-quarters of the $3.6 billion in new cash that stock funds attracted in February went into funds specializing in dividend-paying stocks. Dividend stocks typically appreciate in price more slowly than growth-oriented stocks, but dividend stocks offer greater protection when markets decline. Dividend stocks are popular with risk-averse retirees, because they generate regular payouts whether they rise or fall in price.
Strategic Insight's February data indicate stronger year-to-date flows into stock funds than an earlier report. The researcher's January report indicated deposits into stock funds roughly equaled withdrawals that month. But updated data show more money flowed in than out in January, with net deposits of about $1.4 billion.
Other details of how investors moved their money in February, according to Strategic Insight:
_ Foreign stock funds: Investors deposited a net $6.4 billion, the second consecutive month that flows have been positive. Investors pulled cash from foreign funds from October through December, amid fears that the European debt crisis might spin out of control. Those concerns have eased this year, as have worries that economies in fast-growing countries like China might stall.
_ Bond funds: February total $35.9 billion in net deposits into bond funds included $29.6 billion into taxable bond funds, which primarily invest in corporate bonds. Another $6.4 billion was deposited into municipal bond funds, which invest in bonds issued by state and local governments. Last year, bond funds attracted about $116 billion in new cash.
_ Money-market funds: A net $3 billion was withdrawn from these funds last month, down from nearly $44 billion that flowed out in January. 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 have been barely above zero _ they're now averaging 0.03 percent _ for about three years. 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 $15 billion into ETFs, which bundle together investments in a particular market index. Including January, net deposits total $43 billion, easily putting ETFs 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. ETFs continue to grow much faster than mutual funds, with net deposits totaling $115 billion last year.
_ Long-term funds: At $46 billion, long-term stock and bond mutual funds recorded the largest net deposit total since March 2010, when the total was $49 billion. That's a category that excludes money-market funds and ETFs.