lighthouse etf report - 2013 - april
TRANSCRIPT
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Contents
Introduction .................................................................................................................................................. 3
Flows by Asset Class ...................................................................................................................................... 4
Flows by Asset Class in % 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
Conclusions ................................................................................................................................................. 12
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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
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Flows by Asset Class
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:
International equities experienced $9bn (previous month: $12) billion in inflows Domestic equities saw inflows of $21bn ($16bn) Investment-grade (IG) bonds rose by $3bn ($4bn) Precious metal-related ETF's saw outflows of $7bn (zero) Real-estate remained at $5bn of inflows. Surprisingly, flows into high-yield bond ETF's turned negative. Junk-bond ETF JNK had its third
consecutive month of outflows.
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Flows by Asset Class in % of Assets
An inflow of $1bn does not matter much for SPY, the 'king' of ETF's, with its $125bn assets. However, it
might matter for the $5bn Russel MidCap ETF (IWR). It therefore makes sense to also look at flows
relative to the asset base.
Observations:
Real estate shows the strongest relative inflows of 48% (previous report: 49%) International equity ETF's enjoyed inflows of 26% of AuM (28%) US equity ETF's grew by 23% (20%) of AuM Inflows into high-yield bond ETF's slowed to 5% of AuM (7%), while investment grade ETF's grew
by 3% (5%)
Flows into precious-metal related ETF's fell by 6% (+2%)
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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) has seen three consecutive months of inflows TIP (Treasury inflation-protected bonds) had outflows in 9 out of the last 11 months Enthusiasm for BND (total bond market) continued to cool off LQD (investment-grade corporate bonds) had five months of consecutive outflows Municipal bond ETF (MUB) had 20 consecutive months of inflows
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HY Bonds: Flows in % of Assets
Observations:
The massive inflows into speculative bond ETF's seen in 2012 have come to an end Junk-bond ETF (JNK) had three consecutive months of outflows of $1.2bn or 10% of assets High-yield ETF (HYG) saw two months of inflows after five consecutive months of outflows 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 inflowsstop, additional supply would likely be absorbed only at higher yields
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US Equities: Flows in % of Assets
Observations:
Nasdaq (QQQ) and Dow Jones (DIA) related ETF's have lagged overall inflows into domesticequity 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 IVV remain strong as indices are near all-time highs Inflows into IWR (Russell MidCap) cannot keep pace with the large cap ETF's
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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 the second consecutive month of outflows Emerging Markets ETF (EEM) continued to experience large outflows ($1bn); its third
consecutive month
Emerging Markets ETF (VWO) also had large outflows (-$1.6bn); the second consecutive month
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Precious Metals: Flows in % of Assets
Observations:
Interest in precious-metal related investments is, with the exception of silver, close to a freezingpoint
Flows into the Senior Gold Miners ETF (GDX) were concentrated over two months (August andSeptember 2011), coinciding with the all-time high in spot gold prices ($1,923/oz)
GLD experienced its fourth consecutive month of outflows with a combined $13.3bn, or 21% oftoday's assets, leaving the ETF
Despite negative performance, Gold mining stock ETF (GDX) has not seen any outflows for thethird consecutive month
Despite negative performance, silver ETF (SLV) had only a slight outflow after four consecutivemonths of inflows
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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 remains near the highest level seen since the beginning of our data.
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Conclusions
Current risk appetite remains high International equity ETF's are seeing less inflows than domestic equity ETF's in absolute dollar
terms but higher inflows relative to their asset base
Emerging market equity ETF's are still outpacing those investing broadly in international equitiesbut have experienced a significant slow-down
Inflows into high-yield bond ETF's have cooled off considerably Interest in precious metal-related ETF's remains low; in April, GLD saw the largest outflow of all
ETF's we cover
A prudent or contrarian investor would use the opportunity to shift positions into moredefensive ETF's
Any questions or feedback highly welcome.
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