Download - Lighthouse ETF Report - 2013 - June
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 1/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 1
ETF Report
Exchange Traded Funds - US listed - June 2013
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 2/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 2
Contents
Introduction .................................................................................................................................................. 3
Flows by Asset Class: Dollars ......................................................................................................................... 4
Flows by Asset Class: % of Assets.................................................................................................................. 5
IG Bonds: Flows in % of Assets ...................................................................................................................... 6
HY Bonds: Flows in % of Assets ..................................................................................................................... 7
US Equities: Flows in % of Assets .................................................................................................................. 8
International Equities: Flows in % of Assets ................................................................................................. 9
Precious Metals: Flows in % of Assets ........................................................................................................ 10
Risk Appetite: High ...................................................................................................................................... 11
Mutual Fund Flows: Domestic Equity ......................................................................................................... 12
Correlation: Equity MF Flows and S&P 500 ................................................................................................ 13
Mutual Funds Flows: International Equity .................................................................................................. 14
Mutual Fund Flows: Taxable Bond Funds ................................................................................................... 15
Mutual Fund Flows: Equity Versus Bond .................................................................................................... 16
Mutual Fund Flows: Municipal Bonds ......................................................................................................... 17
Conclusions ................................................................................................................................................. 18
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 3/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 3
Introduction
Since the 'birth' of the first ETF (Exchange-
Traded Fund) in 1993 their march towardssuccess has been uninterrupted. As of
February 2013, US listed ETF's contained
over $1.4 trillion in assets under
'management'1.
With more than $9 trillion in managed
assets23, US mutual funds are still
command a much larger pile. However,
outflows from mutual funds investing in
domestic equities have persisted over thelast 6 years.
Investors, discouraged by
underperformance of actively managed
funds, are switching to ETF's with
significantly lower fees than comparable
mutual funds.
It is fair to assume ETF's will continue to
grow rapidly and will impact market
performance due to their sheer size.
To get insights into investors behavior we
look at flows in and out of the 20 largest ETF's, covering over 40%
of all ETF assets.
Looking simply at assets under management is misleading, since
performance can have a significant impact on the value of assets.
We therefore look at pure flow data, ignoring the impact of
performance. For example: the 57% increase in assets for EEM
(Emerging Markets ETF) could be entirely due to performance, or
flows or a mix of both. The increase in assets of ETF's tracked from $520bn to $605bn from July 2012 to
January 2013 consisted of $40bn of inflows and $45bn in performance.
1Source: IndexUniverse.com
2Source: Morningstar Direct US Open-end asset flows update, January 2013
3Excluding $2.6 trillion in US Money Market Mutual Funds
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 4/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 4
Flows by Asset Class: Dollars
One way to analyze flows is to aggregate them by asset class in dollar terms. Above you see cumulative
flows over the last 12 months.
Observations:
• Real-estate inflows reduced to $4bn (from $5bn)
• Precious metal-related ETF's saw outflows of $12bn (11bn)
• International equities experienced $2bn (previous month: $9) billion in inflows
• Domestic equities saw inflows of $22bn ($27bn)
• Flows into high-yield bond ETF's turned negative with -$1bn (+$1bn)
• Investment-grade (IG) bonds reported outflows of $7bn (-$1bn)
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 5/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 5
Flows by Asset Class: % of Assets
An inflow of $1bn does not matter much for SPY with assets over $100bn. However, it might matter for
the $5bn Russel MidCap ETF (IWR). It therefore makes sense to look at flows relative to assets.
Observations:
• Real estate shows the strongest relative inflows of 34% (previous report: 47%) of their assets.
• Precious-metal related ETF's saw outflows of 11% (-10%)
• International equity ETF's enjoyed inflows of 20% (26%)
• US equity ETF's grew by 23% (27%)
• Inflows into high-yield bond ETF's increased by 3% of AuM (12%)
• Investment grade ETF's saw flows of 11% (-3%) of their assets
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 6/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 6
IG Bonds: Flows in % of Assets
Investor preferences change, and so do flows. Looking at rolling changes in flows can reveal interesting
trends.
Observations:
• TLT (20+ year Treasury bonds) had the largest inflows ($1bn) on record (since January 2011)
• TIP (Treasury inflation-protected bonds) had outflows (-$1.8bn) on record
• Enthusiasm for BND (total bond market) continued to cool off; largest outflow on record
• LQD (investment-grade corporate bonds) had its seventh month of consecutive outflows, losing
$2.4bn (largest on record)
• Even municipal bond ETF "MUB" had its first outflow (-$53m) after 21 consecutive months of
inflows
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 7/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 7
HY Bonds: Flows in % of Assets
Observations:
• The massive inflows into speculative bond ETF's seen in 2012 have reversed
• Junk-bond ETF (JNK) had five consecutive months of outflows of $3bn or 28% of today's assets
• High-yield ETF (HYG) saw outflows during six out of the past nine months
• Waning demand from high-yield ETF's might make it more difficult for lowly rated borrowers to
access capital markets or could lead to stricter covenants
• Leveraged buy-outs (LBO's) depend on a receptive high-yield market for financing; if inflows
stop, additional supply would likely be absorbed only at higher yields
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 8/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 8
US Equities: Flows in % of Assets
Observations:
• Nasdaq (QQQ) and Dow Jones (DIA) related ETF's have lagged overall inflows into domestic
equity ETF's. This might have to do with the end of the bubble in the stock price of Apple, which
is heavily weighted in Nasdaq benchmark indices. For the Dow Jones we can only speculate
investors might finally realize the nonsensical nature of a price-weighted index.
• Inflows into IWR (Russell MidCap) have caught up with its large-cap brothers
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 9/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 9
International Equities: Flows in % of Assets
Observations:
• In good times, investors feel confident and venture abroad in search of higher returns
• Broad international equity ETF (EFA) saw inflows for a second consecutive month ($0.6bn)
• Emerging Markets ETF (EEM) continued to experience large outflows ($11.6bn, or 27% of
today's assets, over past five months)
• Emerging Markets ETF (VWO) also had large outflows ($4.7bn, or 9% of assets, over the past
four months)
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 10/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 10
Precious Metals: Flows in % of Assets
Observations:
• Interest in "paper gold" ETF's continues to wane, while gold mining stock ETF's enjoy signs of
revival
• Flows into the Senior Gold Miners ETF (GDX) were concentrated over two months (August and
September 2011), coinciding with the all-time high in spot gold prices ($1,923/oz)
• Despite horrific performance of underlying stocks, GDX has seen inflows for the fifth consecutive
month
• GLD experienced six consecutive month of outflows with a combined $18bn, or 40% of today's
assets, leaving the ETF
• Silver ETF (SLV) reported mild outflows (-$50m)
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 11/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 11
Risk Appetite: High
Here, we calculate the ratio between two sub-groups of the same asset class:
• speculative bond (HYG, JNK) to non-speculative bond ETF's (TLT,TIP, BND, LQD, MUB)
• international equity (VWO, EFA, EEM) to domestic equity ETF's (SPY, QQQ, IVV, VTI, DIA, IWR)
We used relative assets under management instead of relative flows as the time series are quite volatile.
Observations:
• Risk appetite is cooling off based on investor's preference for domestic over international
equities.
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 12/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 12
Mutual Fund Flows: Domestic Equity
Observations:
• Long-term domestic equity mutual fund outflows continued for the third consecutive month
(data up to mid-June)
• Outflows have occurred on 24 out of the past 26 months.
Conclusions:
• Retail investors see little value in paying elevated fees for active management as most funds
underperform over longer periods
• Global stock markets seem to be more driven by central bank action, which is hard to predict for
the individual investor
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 13/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 13
Correlation: Equity MF Flows and S&P 500
Observations:
• Despite few months of equity MF inflows (dots above the horizontal zero line) a certain positive
correlation exists with the performance of the S&P 500 Index
• However, excluding the two extremes (October 2008, April 2009), the coefficient of determination
declines considerably (r2 = 0.28 instead of 0.45)
• Using 3-months data does not lead to significant improvements in the coefficient of determination
(r2 = 0.51; 0.26 excluding extremes)
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 14/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 14
Mutual Funds Flows: International Equity
Observations:
• Inflows into long-term international equity mutual funds continued for the sixth consecutive
month
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 15/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 15
Mutual Fund Flows: Taxable Bond Funds
Observations:
• Taxable bond mutual funds had the largest outflows (-$23bn up to June 19) since October 2008
(-$33bn)
Factors contributing to sharp increase in 10-year US Treasuries (from 1.6% to 2.6% since May):
• Selling of TIPS (Treasury Inflation Protected Securities) as Fed seems to have given up on N-GDP
(and implicit inflation-) targeting introduced only at the end of 2012
• Selling of Treasury bonds as a hedge for rising mortgage rates ("convexity vortex")
• Investors no longer willing to hold bonds at negative real yields as Fed's talk of tapering QE
sowed doubt regarding its credibility in terms of fighting deflationary trends
• Unwinding of long bond positions by macro hedge funds ('risk parity strategy')
• Unwinding of carry trade in Eurodollar futures
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 16/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 16
Mutual Fund Flows: Equity Versus Bond
Observations:
• Outflows from domestic equity mutual funds have slowed down
• As investors also withdrew from bond funds, around $20bn have been added to retail money
market mutual funds until mid-June
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 17/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 17
Mutual Fund Flows: Municipal Bonds
Observations:
• Municipal bond mutual funds experienced the largest outflows since the "Whitney" crash (on
December 19, 2010, Meredith Whitney predicted hundreds of billions in losses from defaults on
TV)
• Rating agencies are waking up to the growing hole of underfunded pension plans
• A rise in income tax rates would make muni bonds (tax-exempt) more attractive
• An abolishment of tax-preferred status of muni bonds would lead to significant losses for theirowners
• Private investors owning muni bonds directly have usually not the capability to adequately judge
the risks associated with individual bonds
7/28/2019 Lighthouse ETF Report - 2013 - June
http://slidepdf.com/reader/full/lighthouse-etf-report-2013-june 18/18
Lighthouse Investment Management
ETF Report - US listed - June 2013 Page 18
Conclusions
• Risk appetite has cooled off further, but is still considered high.
• Emerging market equity ETF's, as indicated in last months' report, continue to experience
significant outflows.
• Inflows into high-yield bond ETF's have cooled off considerably, with the leading junk-bonds ETF
(JNK) losing 28% of its assets over the past four months.
• "Paper-gold" ETF (GLD) continues to see large outflows and has lost 40% of today's assets over
the past six months. Despite horrible performance, the gold mining stock ETF (GDX) benefited
from inflows for the fifth consecutive month.
• Both mutual equity and bonds funds experienced outflows in June, with the proceeds
apparently going in to money market mutual funds (yielding zero).
• A prudent or contrarian investor would use the opportunity to shift positions into more
defensive ETF's
Any questions or feedback welcome.
Disclaimer: It should be self-evident this is for informational and educational purposes only and shall not be
taken as investment advice. Nothing posted here shall constitute a solicitation, recommendation or
endorsement to buy or sell any security or other financial instrument. You shouldn't be surprised that
accounts managed by Lighthouse Investment Management or the author may have financial interests in any
instruments mentioned in these posts. We may buy or sell at any time, might not disclose those actions and
we might not necessarily disclose updated information should we discover a fault with our analysis. The
author has no obligation to update any information posted here. We reserve the right to make investment
decisions inconsistent with the views expressed here. We can't make any representations or warranties as to
the accuracy, completeness or timeliness of the information posted. All liability for errors, omissions,
misinterpretation or misuse of any information posted is excluded.
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
All clients have their own individual accounts held at an independent, well-known brokerage company (US)
or bank (Europe). This institution executes trades, sends confirms and statements. Lighthouse Investment
Management does not take custody of any client assets.