Retail Investors Focused on Income-Generating Funds

Retail traders are putting money to work during this stock-and-bond pullback, but they are being cautious about where they are deploying their cash, according to Vanda Research. Trading data shows that retail investors are focused on funds that generate income and are relatively insulated from the moves in interest rates, the firm said in a note on Thursday.

Vanda Research noted a surge in Treasury ETF purchases from the retail community over the past week, as bond prices continue to drop. However, the majority of the increase in inflows is concentrated in Money Market Funds and short maturity ETFs. This preference is due to their risk-free nature and the higher yield they provide compared to longer-duration Treasuries.

Defensive Mindset: Gold Stocks and ETFs Climbing in September

Vanda Research also pointed out that gold stocks and ETFs have been climbing in September, indicating a defensive mindset among investors. This trend aligns with the cautious approach taken by retail traders, as they seek to protect their investments during uncertain times.

Retail Investors Favor Broad Market ETFs

Retail investors have been buying stocks, primarily through broad market ETFs like the SPDR S & P 500 Trust (SPY), rather than individual stocks. This preference is seen when the stock market is performing poorly, as these products offer a “safe” upside potential. During optimistic market periods, retail traders prefer picking individual stocks, as they have more available capital to risk and perceive the broader stock market to have limited potential for significant gains.

Retail Behavior Amidst Stock and Bond Market Turmoil

The retail behavior observed comes as the first-half rally for stocks begins to fade, with the S & P 500 down about 4% in the fourth quarter. Furthermore, the 10-year U.S. Treasury yield has reached a 15-year high, adding to the challenges faced by bond prices in the past two years.