Two great ETF research reports ended up in my email box last week: one from State Street Global Advisors (SSgA) and one from Morgan Stanley. The reports contain some excellent data on the what's happening -- not just in the ETF market - but in the market in general. Here's a bit of what I learned…
Flooding Into Size
U.S. exchange-traded fund (ETF) assets rose by approximately $26 billion in October, according to SSgA, bringing year-to-date asset growth to $86 billion. The bulk of the money flooded into size-specific funds, which posted $11.3 billion in new assets in October. That growth was led by $8 billion in new money flooding into the SPDR S&P 500 fund (SPY), however, so you can't trust it: the SPDR sees huge floods of money come in and out each week, thanks to both traders and to institutional investors and mutual funds that are looking for a quick place to park cash. The huge growth doesn't necessarily mean, then, that investors are "hot" on large-cap U.S. stocks.
One area that investors are "hot" for is international stocks, which continue to attract huge assets. International ETFs posted the second largest growth of any product category in October, adding $5.3 billion in assets. That brings the year-to-date total for international funds to $26 billion, up 42 percent over year-ago levels.
Other fast growing areas of the market this year include commodity funds, which have pulled in a health $6.4 billion, and the newly launched currency funds, which have pulled in close to $1 billion. Investors are embracing ETFs as a way to access areas of the market that were formally off-limits, or at the very least, prohibitively expensive.
One area of the market that's not attracting much attention is the broad market category, including funds like the streetTRACKS Total Market ETF (AMEX: TMW) or the Vanguard Total Market ETF (AMEX: VTI). Those funds have netted just $2.1 billion this year, despite offering very low fees and broad market exposure. It's a sign that investors are using ETFs for strategic asset allocation plans, rather than simple buy-and-hold index investing.
A look at the growth in sector assets is also worthwhile. Surprisingly, REITs continue to do well, with assets up $400 million in October and more than $3.3 billion year-to-date, the most of any sector. It seems that investors believe that the real estate market will find a soft landing, or, at the very least, that commercial real estate will do well even if residential real estate suffers.
Investors aren't so sanguine on the Energy front, however, where they pulled $542 million out of the sector in October. Energy funds have stilled pulled in $1.7 billion in total this year, but it looks like a good portion of that was "hot money" that was chasing returns.
The big winners in October were Consumer Discretionary and Materials funds, which posted asset growth of 36.7 percent and 18.6 percent, respectively. Investors seem to be embracing these two largely forgotten sectors.
The same can't be said for the long-forgotten technology/telecom space. Although Tech/Telecom funds pulled in a healthy $657 million in October, they have posted the lowest year-to-date percentage growth of any sector. That's a bit strange, as Telecom has been by far the best-performing sector this year, posting 26.8 percent returns. Utilities are next best, with returns of just 13.7 percent.
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Of all the data in the SSgA report, my favorite this month may be the breakdown by market cap and style.
Market experts have been waiting for ages for large cap stocks to recapture their leadership position in the market. Although one month does not make a trend, large caps certainly had a strong month in October on the asset front, with assets surging nearly $10 billion. As discussed, however, much of that was in the SPDR, which sees very volatile fund flows. It's certainly too early to say that investors are turning back to large caps.
Similarly, growth stocks aren't getting much love either. Investors continue to favor value ETFs, with value assets up $7.2 billion this year compared to just $3.4 billion for growth ETFs. Something tells me investors are fighting the last battle...
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As strong as the ETF market is in the U.S., ETFs are growing even faster on a global basis, according to a new report from Morgan Stanley. The Morgan Stanley report covers through the end of the third quarter, and shows European ETF assets up 39.7 percent year-to-date, compared to just 19.3 percent in the U.S. and a paltry 1 percent in Japan.
Morgan Stanley says that, as of Q3, there were 669 ETFs worldwide with a net $504.5 billion in assets. The bank expects that number to top $2 trillion by 2011, driven by increases in both usage and the number of ETFs available.
There are currently 304 ETFs in development, including 57 in Europe, 225 in the U.S. and 22 in the rest of the world. Already, 211 ETFs have launched globally this year, compared to 119 in all of 2005.
In Europe, the recent acquisition of Indexchange by Barclays Global Investors has seriously altered the balance of the ETF industry. Previously, the bulk of the market was split three ways between BGI (with 24.3 percent of assets), Indexchange (with 23.2 percent of assets) and Lyxor (with 24.7 percent of assets). With the new acquisition, BGI now has a nearly 50 percent share of the market, and threatens to dominate it the way it does in the U.S.
So why are ETFs such a hot thing in Europe? Consider this quote from the Morgan Stanley report:
"The average total expense ratio (TER) for equity ETFs in Europe now stands at 45 basis points per annum, which is significantly below the average TER of 100 basis points for equity index funds in Europe and the average TER of 191 basis points per annum for active equity funds in Europe, as reported by Fitzrovia.
The average TER for fixed income ETFs is 17 basis points per annum, which is also below the average 109 basis points charged by fixed income funds in Europe, according to Fitzrovia."
Growing Fast, But Still Far To Go
Another tidbit that jumped out at me from the Morgan Stanley report was this chart, showing the growth in index assets as a percentage of total assets under management, as well as the split between ETFs and traditional index funds.
The results are somewhat disheartening: while indexed assets surged from 1998 through 2004, that growth has mostly flat-lined since. Indexed funds - as opposed to ETFs - have actually shrunk as a percentage of total fund assets, falling from 10.4 percent in 2004 to just 10.1 percent today. ETFs have made up the slack, but still, an awful lot of Americans are falling into the active trap.
[Morgan Chart here]