Mazzilli: Leverage & Inverse ETFs Produce Outflows While TIPS Surge In July

August 17, 2009

As uncertainty persists, bonds see surge in flows while commodity ETFs top $20 billion in net inflows by the end of July.


(Editor's Note: The following is IndexIQ analyst Paul Mazzilli's monthly research note.)


After rising 15.2% in the second quarter of 2009, the S&P 500 Index gained another 8.5% in July, reversing the 19.5% decline in the first two months of 2009. The index is now up 11% for the year through July, and is up almost 30% from its lows of the year. There is growing concern that the market may have moved too quickly.

There are many positives that can keep the market moving upward, including attractive valuations from an historical standpoint, large amounts of cash on the sidelines, and low investor confidence. Better than expected employment numbers indicate that we may have seen the worst of the recession, although uncertainty about future growth still prevails. In this challenging environment, financial advisors and investors continue to seek ETF strategies that will perform well and add portfolio diversification.


ETF Flows

  • U.S.-listed ETF assets ended July at $650 billion, which is the largest month-end amount ever. Total assets are now up $120 billion for the year due to net cash inflows of $55 billion and the recovery of the equity markets.
  • July was the second busiest month this year in terms of new ETFs launched in the
  • Interest in traditional equity ETFs slowed in early 2009, but has now had three months of positive inflows. Inflows of $6 billion in July reduced total year-to-date (YTD) outflows to $27 billion.
  • International developed and emerging market ETFs continue to see positive inflows. Positive cash flows of $6.3 billion in July bring the YTD total to $15.6 billion.
  • Fixed Income ETFs had net inflows every month this year and this was the leading category in June with $3.3 billion, bringing YTD net inflows to $26.8 billion. In contrast to 2008, when investors were seeking high quality and short duration exposure, the biggest gainers in 2009 are investment grade and high yield bond ETFs. Through May, over $5.1 billion went into the iShares iBoxx Corp Bond ETF. The iShares Barclays TIPS ETF has the largest cash inflows into any fixed income ETF this year of $5.6 billion, as some investors believe government stimulus will bring back inflation.
  • Traditional long
    equity ETFs had the best monthly inflows of the year, taking in $6.3 billion in July, while YTD outflows are still over $13 billion. The SPDR S&P 500 Index ETF (SPY) has net YTD outflows of over $27 billion, with $3 billion in July.
  • Commodity ETF cash flows were flat in July. However, ETFs offering exposure to commodities have now attracted over $22 billion. The biggest gainer for the year is SPDR Gold, which took in $10.4 billion. Cash flows turned negative with July outflows of $1.5 billion representing the first the negative month of the year. The US Natural Gas ETF had the second largest cash inflows of any ETF in July of $1.2 billion bringing the YTD total to over $4.6 billion.
  • Leveraged and Inverse ETFs had negative cash flows for the first month this year of about $1.5 billion. The YTD total is still over $20 billion, but recent regulatory concerns about the use of these products may hamper growth. Some wirehouses have put restrictions on the use of leveraged ETFs. New restrictions on retail accounts could further hamper growth in coming months.


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