Year In Review: ETFs Defy Stereotypes In 2008

January 07, 2009

As investors end the year by flocking into ETFs, they keep putting money into parts of the market that mutual fund investors are dumping.


The flight to safety in stocks and mutual funds dominated investment trends in 2008.

But investors in exchange-traded funds made their own way last year. Based on an analysis of money movements into and out of ETFs, the past 12 months shaped up as a dramatic period of separation for the fast-growing industry.

For one, so-called net flows—which compare redemptions against creation activity—moved in exact opposite directions as those of traditional open-end mutual funds. That's not the first time such an occurrence has taken place. But last year marks what appears to be the biggest such reversal in fortunes for money flows between ETFs and more established mutual funds ever seen.

Setting the stage was a stock market in which the S&P 500 lost some 37% in 2008. And bonds, plagued by an ongoing global credit crisis, struggled mightily with increased volatility. Some segments, such as high-yield bonds, performed almost as poorly as the broader stock market. The SPDR Lehman High Yield Bond (NYSE: JNK) slipped more than 30%.

But for growth-minded investors who weren't worried about slim yields, bond ETFs did afford some shade from the oncoming recessionary storm. For example, the Vanguard Extended Duration Treasury Index ETF (NYSE: EDV) returned 50%-plus last year. And that was with less than a 2.6% yield.

Still, that market environment would suggest that ETF investors would flock to bonds, right? After all, critics of the new up-and-coming fund industry argue that their popularity is largely being driven by traders, not long-term-oriented investors.

Read on. Tapping into the National Stock Exchange's database, a major theme in 2008 seems to be that ETF investors not only put more money into their funds, but they also flocked by large margins into the worst-performing categories.

So here's our initial year-end review. At the bottom of this report are a number of tables, breaking down almost every type of data point available through NSX's database of 848 ETFs and exchange-traded notes. These include flow and asset numbers for providers of ETFs and exchange-traded notes as well as category figures. Specific individual ETF and ETN data is also listed in the accompanying charts.

Fund Flows: ETFs Vs. Mutual Funds

Investors kept pumping more money into U.S.-based exchange-traded funds in December, finishing 2008 with a flourish as the fund industry's fastest-growing marketplace attracted nearly $178.4 billion in net inflows for the year. That was a record, some 20% more than the previous high, which was set in 2007.

The latest National Stock Exchange data estimated that in last year's final month, ETFs had a record $42.8 billion. That was a significant increase from the previous month's $26.4 billion net inflow. But it wasn't quite up to September's $50 billion-plus in record inflows.

By contrast, U.S.-based long-term mutual funds had record net outflows in October 2008 of $127.55 billion. That was followed by November's $41.31 billion net outflow, according to the Investment Company Institute, the industry's largest trade group. Its tracking of monthly flows includes more than 8,000 traditional mutual funds—by far the most extensive such survey in the country. That isn't surprising since it's the industry's largest trade group and doesn't break out numbers for individual companies.

The ICI hasn't released its December survey data yet. But analysts at Emerging Portfolio Funds Research, which tracks both institutional and retail fund flows around the world, is estimating a record $320 billion in net outflow for mutual funds worldwide in 2008. And TrimTabs Investment Research is projecting that while last month's outflows subsided from November's torrid pace, U.S.-based mutual funds were still on pace to record net outflows in December.

Trends Continue To Rise For ETFs & ETNs

Although facing the same market conditions, ETFs offered a stark contrast by ending the year with a flourish. Even struggling exchange-traded notes, which are typically issued by large banks and represent unsecured debt, produced $823 million in net inflow during December. For the year, ETNs finished with slightly more than $2 billion inflow. That was off about a third from the previous year's totals, however, as fears of the ongoing global credit crisis crimped the growth of ETNs in 2008.

Two players—Barclays Global Investors and State Street Global Advisors—dominated final inflow results. In December, the pair combined to account for more than $32 billion of the industry's $42.8 billion total net inflow. In distant third place was Vanguard, with $3.8 billion.

Four out of 25 ETF providers actually had net outflow in the final month of 2008. But those were relatively minor, led by Merrill HOLDRs losing $46 million. Invesco PowerShares was the next biggest in the red, with outflows of $33 million. But both were solidly in positive territory for the year, marking a reversal of fortune in the case of the HOLDRs. In 2007, those exchange-traded products had about $3.7 billion in net outflow.

In fact, the only other ETF sponsor with net outflows two years ago also reversed course in 2008. Fidelity Investments, with one ETF, had $8 million inflow during 2008 to top the previous year's $30 million net outflow from the Fidelity NASDAQ Composite Index Tracking Stock ETF (NasdaqGM: ONEQ).


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