The Markets November 10, 2010

ETFs Enjoy Healthy October after Robust September

Exchange-traded funds saw net inflows of $13.1 billion in October, on the heels of September's inflows of $25.5 billion, according to the latest Morningstar data.
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A Morningstar news release said the healthy inflows along with general market appreciation helped push total net assets in the industry to nearly $945 billion, representing year-over-year growth of 34%. Since the beginning of the year, investors have poured $80.6 billion into U.S.-listed ETFs.

Morningstar said the most popular asset class continues to be international stock, which has seen massive inflows driven by investor demand for emerging markets exposure. U.S. Stock ETFs were also popular in October, as investors looked to bulk up their exposure to “risky assets.” ETFs in the U.S. stock asset class saw net inflows of $3.5 billion, despite the fact that some of the largest and most heavily traded funds in the group (such as SPDR S&P 500 SPY, iShares S&P 500 Index IVV, and PowerShares QQQ QQQQ saw net outflows in the month.

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2010 a Big Year for Vanguard?  

Also, according to Morningstar, 2010 has been Vanguard’s year. In fact, Vanguard has collected roughly 39 cents out of every dollar in net inflows that U.S.-listed ETFs have seen so far this year. Assets parked in BlackRock’s iShares business have grown 24% over the past year, but its market share has fallen by 3.7% to about 45.6% of industry assets. The number two player, State Street Global Advisors, has grown its asset base by more than 34% over the past year, which helped keep its market share relatively constant at just below 24% of industry assets.

Vanguard’s ETF assets, on the other hand, exploded higher by more than 72% over the past year, boosting the firm’s market share by 3.2% to 14.5% of industry assets. By examining the data, it would appear that Vanguard’s gain has been iShares’ loss. It doesn’t look as though Vanguard will be letting off the throttle anytime soon either. Vanguard has already introduced 16 new ETFs to the market this year–including an ETF share class of its Vanguard 500 Index Fund–and has many more sitting on the registration shelf.

Aside from iShares, the largest market share loss over the past year belonged to ProShares. The leveraged ETF provider was the only major ETF provider to post negative asset growth (negative3.6%) over the past year. Competition for traders’ dollars has heated up considerably with the presence of Direxion Funds, which grew its asset base by 36.5% during the same period. As such, ProShares’ market share fell by more than 1% and currently stands at 2.6%.

The past year has also been a good year for Van Eck’s ETF business. The firm, known for its Market Vectors products, has grown from around $10 billion in total net assets last year to more than $17 billion at October month-end. Some of the firm’s newer products have been a resounding success with investors, including its Junior Gold Miners ETF GDXJ and Brazilian small-Cap ETF BRF.

For some perspective on just how popular emerging markets have become, Morningstar noted that the more than $25 billion that has flowed into Diversified Emerging Markets ETFs since the beginning of the year represents 32% of all ETF inflows and nearly 76% of total net inflows into ETFs in the international-stock asset class.

U.S. Equity ETFs 

Morningstar said U.S. Stock ETFs reined in nearly $3.5 billion in October, despite some of the largest ETFs seeing sizable outflows for the month. Dividends were the predominant theme within U.S. Stock ETFs in October. Last month, SPDR S&P Dividend SDY and iShares Dow Jones Select Dividend DVY attracted net inflows of $773.6 million and $458.9 million, respectively. Moreover, high yielding plays including Vanguard REIT Index VNQ, JPMorgan Alerian MLP Index ETN AMJ, and iShares S&P U.S. Preferred Stock PFF were popular, with monthly inflows of $453.3 million, $266.2 million, and $212.5 million, respectively.

Last month, investors were also allocating capital to two cyclical sectors that could potentially benefit from the effects of the Federal Reserve's Quantitative Easing (QE2)--technology and financials. Technology Select Sector SPDR XLK attracted $990 million last month, while Financial Select Sector SPDR XLF attracted $711 million.

The Markets November 10, 2010

Funds Take in $26B in October

Investors contributed $26.8 billion to long-term mutual funds in October, about twice the previous month's tally, according to the latest Morningstar fund flow data.
Reported by

A Morningstar news release said the difference is owed to a slower pace of U.S. equity redemptions and one big distortion in international stock flows.

According to Morningstar, outside of U.S. equities, every asset class had positive inflows. International-stock funds had their best month since April, although this owed primarily to continued strong flows into diversified emerging-markets equity funds.

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Balanced funds also turned in their best month since April, with $2.3 billion in positive flows, according to the data. As has been the recent trend, investors embraced the two poles within the group–world-allocation and conservative-allocation funds. BlackRock Global Allocation led the world-allocation category with nearly $1 billion in inflows.

Demand for taxable-bond funds remains steady with $20.6 billion in contributions. According to the data, intermediate-term bond funds continued to lead the way, with $5.6 billion in inflows, but short-term bond funds have been supplanted in the rankings by world-bond and multisector bond funds, which absorbed $3.7 billion and $3.1 billion, respectively.

Ebbing Muni Bond  Interest  

On the other hand, investor enthusiasm appears to be ebbing for municipal-bond funds. While this group took in $1.8 billion in October, inflows have been declining since September 2009. This could be considered somewhat surprising, given the possibility of higher tax rates in the future, but it may also owe to concerns over municipal finances.

The pace of U.S. equity fund redemptions declined significantly in October to $6.3 billion from $18.3 billion the previous month. In fact, this past month’s outflows were the smallest since May’s flash crash. But this still marks the sixth consecutive month of outflows, despite a powerful recent U.S. equity rally, Morningstar said. .

Nevertheless, investor aversion to U.S. equities remains, as $64.2 billion has now left these funds in 2010. However, passively managed funds remain popular, enjoying inflows of $2.2 billion versus $8.5 billion in outflows for actively managed funds. While investors are embracing risks in other parts of the market, U.S. equity manager risk is not one of them, Morningstar commented.

For those leaving U.S. equities, large-cap funds continued to be a favorite source of liquidity. The three major large-cap categories accounted for the vast majority of outflows, a combined $6.7 billion, Morningstar said. As occurred last month, large-growth funds endured the worst of it. This category’s $7.3 billion in September outflows was more than the combined redemptions in the large-value and large-growth categories. Although the absolute level of outflows fell in October, the trend was even more acute, as the $4.3 billion that fled large-growth funds was almost twice the combined $23 billion that left the large-value and large-blend categories.

Outside of the United States, demand for emerging-market equities remains strong with $2.3 billion in October inflows. However, that understates their increasing popularity. Vanguard announced in late September that it would replace Vanguard Emerging Markets Stock Index, Vanguard European Stock Index, and Vanguard Pacific Stock Index with Vanguard Total International Stock Index in its target-date lineup and with three funds-of-funds.

Morningstar said this led to significant swings within the international stock asset class. Vanguard Total International Stock Index gained $10.7 billion in flows last month versus $2.5 billion in outflows for Vanguard Emerging Markets Stock Index.  

As yields have fallen in recent years, investors have become bolder. However, rather than go farther out on the yield curve, they have instead gone down the credit ladder. Inflows into long-term bond funds of all stripes remain fairly tepid. On the other hand, within both the taxable- and municipal-bond universes, this quest for yield has come at the expense of short-term bond funds.

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