The Markets April 13, 2011

ETF Flows Pick up Pace in March

Although the pace of flows into U.S. exchange-traded funds (ETFs) has decelerated in the past several months, March saw the pace pick back up, Morningstar Direct reports.
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According to the Morningstar Direct Fund Flows Update, ETF inflows rose to $7.4 billion from $6.6 billion a month prior.U.S. stock ETFs saw an aggregate $3.3 billion outflow in March. The lion’s share of those outflows came from the large-blend and growth categories of the style box, which saw $6.2 billion and $963 million in outflows, respectively.  

Last month’s U.S. stock exodus was led by SPDR S&P 500 SPY, which claimed a $5.7 billion dollar outflow. Morningstar said many of the big names in broad index exposure followed suit, with iShares S&P 500 Index IVV, PowerShares QQQ QQQ, and SPDR Dow Jones Industrial Average ETF DIA bleeding $1.2 billion, $751, and $628 million, respectively.  

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Flows for U.S. stock were not, however, all outgoing. Morningstar data shows lateral movement within the asset class, as investors shifted into more narrowly targeted exposure. By category, equity energy, natural resources, consumer discretionary, and consumer staples attracted the largest flows. They accounted for $654 million, $579 million, $362 million, and $349 million, respectively. 

International Stock carried the day, realizing a net $6.7 billion inflow after facing $508 million and $3.3 billion outflows in January and February, respectively. At $2.8 billion, iShares MSCI Japan Index EWJ saw the largest quarterly inflow of any U.S. ETF. Vanguard MSCI Emerging Markets ETF VWO claimed the largest monthly ETF inflow in March--$1.83 billion in total.  

Over the last seven months, flows into the taxable-bond space have been meager at best. That said, last month saw the space make a healthy contribution to aggregate ETF inflows, collecting roughly $3.1 billion in total. The largest inflow within the space was claimed by iShares Barclays 1-3 Year Credit Bond CSJ, which saw a $334 million inflow, and followed closely by iShares iBoxx $ High Yield Corporate Bond HYG.  

Given recent performance, the commodities ETF space realized a mild outflow, around $218 million. However, according to Morningstar, there were several noteworthy points here. United States Natural Gas UNG bled just under $2.6 billion last month. Spot NG was down roughly 5.5% on quarter. 

The Markets April 13, 2011

U.S. Stock Flows Fall in March

The pace of long-term inflows slowed slightly to $27 billion in March, from nearly $28 billion in February, due largely to a drop in U.S. stock flows, according to the Morningstar Direct Fund Flows Update.
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After nearly $26 billion of inflows in January and February combined , U.S. stock funds saw $934 million in March outflows. International-stock funds, by comparison, took in a relatively robust $6 billion, the Morningstar report said. That was driven by nearly $2.7 billion in emerging-market inflows, after the category had experienced anomalous, modest outflows the previous month.

Taxable bonds slightly surpassed February’s haul with $18 billion in inflows, as bank-loan funds led the way with $4.3 billion. Municipal-bond outflows slowed for a third consecutive month, with less than $2.6 billion in outflows. Still, more than $40 billion has vacated municipal-bond funds over the last five months, which represents 7.8% of beginning total assets.   

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Demand for alternative and commodity funds remained steady with $1.1 and $1.8 billion, respectively, in inflows. Finally, money market funds saw $12.5 billion in net outflows. Unlike past months, outflows were roughly even between taxable and tax-free offerings. 

According to the Morningstar report, within U.S. stock funds, large-cap offerings returned to the penalty box, shedding about $3.2 billion across the value, blend, and growth categories. On the other hand, small-cap funds continued to enjoy inflows, although with a modest $800 million. While large-cap funds have rallied with the market, small-cap funds continue to get the better of them.  

As a result, small-cap stocks trade at about a 25% premium to large-cap stocks based upon forward P/E ratios. This small-cap preference generally hasn't held with international-stock funds. In March, large-cap funds acquired $3.6 billion in new money versus just $300 million for small-cap offerings. This pattern has held over the last three years as well, with large-cap foreign-stock funds absorbing $23.2 billion versus $3.5 billion for small caps.   

That's in sharp contrast with U.S. stock funds, Morningstar said. Large-cap funds have suffered $147.4 million in outflows against about $14.7 billion in small-cap inflows. 

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