Investors Switch Course, Pour $8 Billion Into ETFs

April 03, 2009

After pulling $6 billion from ETFs the previous month, investors pour more than $8 billion back into the market in March.


It's a well-worn cliché. But in the case of an exchange-traded funds marketplace that isn't accustomed to many shortfalls in cash, the latest sign of renewed interest by investors begs for an exclamation point.

What a difference a month makes.

On Friday, the National Stock Exchange compiled its latest data on money flows and assets for the market. In March, more than $8 billion of net inflows went into ETFs.

That reversed an anomaly from February, when investors pulled some $5.8 billion from ETFs—the first time in more than a year that the industry had recorded net outflows. (For a complete listing of the month's data, see the NSX's tables at the end of this article.)

In fact, a clearer picture emerges for putting the latest figures into perspective by excluding money flow for the S&P 500 SPDRs (NYSEArca: SPY) and the PowerShares QQQ (Nasdaq: QQQQ). Those are two of the most heavily traded funds on the market and often tend to skew short-term statistics, since combined they hold nearly $73 billion in assets.

Minus SPY and QQQQ, March represented the 79th straight month of net inflows into ETFs as a whole. Perhaps more to the point, just taking out SPY left the ETF marketplace with slightly less than $30 billion in net inflow for the year through March. That would've marked the biggest first-quarter inflow totals on record.

The industry's assets showed growth as well in the month. The 752 listed ETFs in the U.S. had $484.6 billion in assets at the end of March, up from $456.3 billion in the previous month (when there were four more). Also, exchange-traded notes had an uptick in assets, to nearly $4.6 billion, an increase from February's $4.3 billion. (The number of ETNs was the same between months—87.)

From A Macro View

No doubt, tumbling markets accounted for much of the turmoil in February. Along those same lines, a 20%-plus rally had much to do with the return of investors in March.

But there seems to be more at play here. Through a bear market that started in the second half of 2007, ETFs have continued to gain more new money from investors on a monthly basis—in good times and not-so-good.

So does last month's strong inflow data reveal any insight that February was a temporary situation and not a slowing in the mostly uninterrupted decade-long growth in the ETF market?

Much of the answer might come down to how strongly investors feel about using leveraged ETFs in their portfolios. If the market has bottomed, will they switch from ETFs that short indexes to ones that leverage markets and move in the opposite direction?

In March, some 30% of all ETF trading volume was tied to leveraged and inverse funds. But it wasn't a case of all ETFs featuring those types of strategies producing positive results. ETFs that short markets actually had net outflow of $1.8 billion.

By comparison, every type of long leveraged fund—which typically take200% or 300% positions in the market—generated more than $3 billion innet inflow. That pushed their totals for the year through March toalmost $6.3 billion net inflows, representing about five times thetotals compared to the same period last year.

Also revealing was the fact that long-only funds not using leverage had net outflow of slightly more than $7 billion in March. Leading the rush for exits was U.S. stock funds with nearly $15.7 billion in outflows. Global and international ETFs also were in the red for the month, down some $1.9 billion.

But there were some positive results in the long-only category. Fixed-income ETFs attracted $2.8 billion, while commodity funds had another $7.6 billion in net inflow. Currency ETFs also added another $66 million in the month.

SSgA Takes Biggest Hit

The most heavily hit among sponsoring ETF companies was State Street Global Advisors, which had slightly more than $2 billion in net outflows in March. But that figure is heavily skewed by one fund—SPY. The heavily traded ETF, which is used by a large number of institutions as a short-term cash instrument, produced nearly $13.6 billion in net outflow in the month. For the year, it has net outflow of almost $24 billion.

In fact, the only other major single ETF to experience relatively large outflows in March was the iShares MSCI EAFE Index (NYSE: EFA). It had about $1.4 billion in net outflows.

Barclays Global Investors actually had a strong month, with nearly $4 billion in net inflow. But that came on the strength of its growing bond family of ETFs. The iShares Barclays TIPS (NYSE: TIP) had $840 million in net inflow and the iShares iBoxx Corporate Bond ETF (NYSE: LQD) had inflow topping $900 million.

But the most popular ETF by far last month was SPDR Equity Gold (NYSE: GLD). It attracted more than $6.4 billion in assets. The next-biggest was the iShares MSCI Emerging Markets Index (NYSE: EEM) with $1.5 billion in net inflow.


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