The Markets April 15, 2010

ETFs Enjoy March Inflows of $20B

Investors plowed $19.7 billion into exchange-traded funds (ETFs) in March, helping to push total net inflows for the ETF industry to $7.7 billion for the first quarter of 2010, Morningstar reported.
Reported by

At month’s end, total ETF assets stood at $815 billion, up from $764.6 billion at the end of February and up from $484 billion a year ago, Morningstar said in its latest report about the ETF industry.

After 30 consecutive months of net inflows, iShares Barclays TIPS Bond’s TIP streak came to an end in March, as the fund experienced $73.6 million in net outflows.

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Morningstar said many could be hunting for inflation protection elsewhere—namely in equities and commodities. Potential interest-rate hikes are on investors’ minds as they continue to shift their fixed-income exposures to the short end of the yield curve.

Meanwhile, iShares Barclays Short Treasury Bond SHV led the taxable bond asset class with $1.7 billion in net inflows in March, followed by iShares Barclays 1-3 Year Credit Bond CSJ, which added another $423.1 million in March. Conversely, iShares Barclays 20+ Year Treasury Bond TLT led taxable bond outflows with $133.0 in net redemptions for the month.

According to the report, yield-hungry investors also loaded up on junk bonds, as iShares iBoxx $ High Yield Corporate Bond HYG and SPDR Barclays Capital High Yield Bond JNK took in $464.3 million and $451.7 million last month, respectively.

Funds offering broad index exposure fared well in March, with SPDRs SPY, PowerShares QQQ QQQQ, and iShares S&P MidCap 400 IJH all making the overall top-10 inflows list for the month, pulling in $3.4 billion, $1.7 billion, and $451.1 million, respectively. On the flipside, iShares Russell 2000 Index IWM and Vanguard Small Capitalization VB saw net outflows of about $996.4 million and $441 million, respectively.

Vanguard Emerging Markets VWO attracted another $784 million last month and $2.8 billion in the first quarter. Last month EEM shed another $719.4 million and through Q1 has seen more than $4.2 billion head for the exits.

Morningstar said single-country funds topping international equity inflows with more than $200 million in net inflows included iShares MSCI Hong Kong EWH, iShares MSCI Australia EWA, iShares MSCI Canada EWC, Market Vectors Russia RSX, and iShares MSCI Mexico Investable Market EWW. In contrast, iShares FTSE/Xinhua China 25 FXI and iShares MSCI Japan EWJ saw net outflows $289.2 million and $119.2 million, respectively.

Leveraged ETFs with bullish exposure (two times and three times) experienced outflows of roughly $1.8 billion. Direxion Daily financial Bull 3X Shares FAS led the way with $646.9 million in outflows, followed by Ultra Financials ProShares UYG which saw $269.0 million in outflows. Demand for long-biased leverage was decidedly weak in March; top inflows went to PowerShares DB Gold Double Long with just $21.7 million in net inflows.

Morningstar said March was a busy month for ETF providers; a total of 18 new ETFs launched. In addition to these new funds, March saw two more prominent fund firms, J.P. Morgan Chase and Eaton Vance, toss their hats into the actively managed ETF ring, joining the likes of Goldman Sachs, Legg Mason, and T. Rowe Price.

The Morningstar report is available here.
  

Compliance April 15, 2010

Beverly Enterprises Settles 401(k) Excessive Fee Charges

Beverly Enterprises has agreed to settle for $6.25 million claims that it caused its 401(k) plan to incur excessive fees.
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According to a report by investment adviser Fiduciary Counselors, participants sued to recover losses they allegedly suffered as a result of the defendants’ breaches of fiduciary duties under the Employee Retirement Income Security Act (ERISA). The participants claimed the plan was systemically neglected for a period dating back to 1996 and that virtually all of the investment options offered to plan participants prior to 2006 underperformed.  

The plaintiffs also specifically alleged that in connection with a change of service providers from Diversified Investment Advisors  to Fidelity Investments in 2006, the plan’s fiduciaries breached their duties by causing the plan to incur a $2.3 million market value adjustment (MVA) when defendants chose to liquidate the Stable Value Fund, and improperly transferred assets from the Stable Value Fund, an investment option designed to protect participants’ principal, to riskier mutual funds that subsequently suffered investment losses. Finally, the participants claimed that certain service providers, including Diversified, Fidelity, and Stephens Inc., received excessive fees and as a result engaged in prohibited transactions.  

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The settlement agreement was reached in mediation in November before the case went to trial. U.S. District Judge Nathaniel M. Gorton of the U.S. District Court for the District of Massachusetts approved the settlement, which included a payment of $10,000 each to the three lead plaintiffs and a payment of more than $1.9 million to attorneys.

The court had certified a class that included all participants and beneficiaries of the Beverly 401(k) SavingsPlus Plan from 1996 through the present, excluding any defendants.

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