A multi-year shift by investors out of equity mutual funds and into equity exchange-traded funds is now broadening to include fixed income, too, as investors seek lower fees as well as the relative ease of shifting asset allocations afforded by ETFs.
"We're seeing a continuing trend over the past 12 months of investors moving out of equities and into bonds," Jennifer Grancio, iShares Global Head of Business Development at BlackRock, says. When it comes to ETFs, this trend is being magnified investors turning away from mutual funds and into ETFs, Grancio says. And, according to a study recently released by BlackRock, entitled "ETF Landscape: Industry Highlights," exchange-traded product assets have hit $1.7 trillion globally.
The study reports that during all of 2011, investors shifted $172.4 billion out of equity mutual funds, while injecting $111.7 billion into equity ETFs. Fixed income ETFs pulled in another $49.9 billion over the period, while fixed income mutual funds, also gainers, picked up another $104.2 billion in invested assets.
Last year, commodity ETFs gained $11.8 billion in assets under management, compared to $13.9 billion for commodity mutual finds. For the first quarter of 2012, equity ETFs had an inflow of $19.7 billion, compared to an outflow of $18 billion for equity mutual funds. Over the same period, fixed income ETFs picked up $36.3 billion in net inflows, compared to $104.0 billion for fixed income mutual funds.
In April alone, the macro trend investors moving out of equities led to a net outflow of $4.4 billion from equity ETFs, and $6.9 billion in redemptions for equity mutual funds, compared to a gain of $5.7 billion in new money for fixed income ETFs and a $11.5 billion inflow into fixed income mutual funds.
"Fully 2.5% of all equities today are held in ETFs," Grancio says, "and only 0.3% of fixed income is in ETFs. Now that's changing. In today's markets, where people are looking at ways to move funds quickly, they are increasingly turning to ETFs, and they are doing that for fixed income as well as equities." Grancio says she expects this double-whammy to double the percentage of fixed income products in ETFs over the "next couple of years" to 0.6% or higher.
The investor search for yield has led to a 55% increase in investment grade and high-yield corporate bond ETF assets over the 12 months ended in April, to $96.4 billion this year from $62.0 billion a year ago. The trend has continued to be strong, with investment grade and high-yield bond ETFs pulling in $2.1 billion and $1.1 billion in new investment money this past April alone.
This growing popularity for bonds, specifically for ETF bond funds, has made stars out of two new ETF bond funds, which by a wide margin led a list of 285 new ETFs launched since the beginning of the year. The top performer on this list of new products, in terms of assets under management, was the PIMCO Total Return ETF (BOND), a fund of 300 holdings that launched with $100 million in assets and as of May 10 boasted more than $700 million in assets.
Consider the view of this fund by Morningstar bond analyst Timothy Strauts. In a May 9 report on the new fund, he says that PIMCO Total Return ETF has, to date, far outstripped the performance of its mutual fund mentor, the PIMCO Total Return Institutional Fund (PTTRX), the largest mutual fund for both PIMCO and the nation.
In fact, PIMCO Total Return ETF gained 4.1% from its Feb. 12 inception through May 10, Strauts says, while the mutual fund with the same strategy only gained 1.84% over the same period. Strauts calls the ETF's performance "astounding," but cautions investors not to expect that kind of appreciation to continue through the year.
Strauts also says there are significant differences between the two funds, even though their strategies are similar and both are benchmarked against the Barclays U.S. Aggregate Bond index. An advantage for the ETF, which is an active fund, he says, is that it is restricted from using derivatives and can only be invested in actual bonds, while the much larger mutual fund uses swap agreements to gain exposure while staying relatively nimble. "The benefit of individual bonds," he explains, "is that PIMCO can employ its sector specialists to pick out the best possible bond issues. Effectively, the ETF is performing like [PIMCO CIO] Bill Gross's 'best ideas' list."
The PIMCO Total Return ETF currently lists its major holdings to include Fannie Mae 4% 30-year bonds (9.13% of holdings), Fannie Mae 3.5% 30-year bonds (7.72%), Sallie Mae student loans (7.46%), U.S. Treasury Notes (7.39%) and Federal Home Loan Mortgage Bonds (6.44% of holdings).
In contrast, Strauts says, since bond swaps involve a broader index, it is not possible to pick individual holdings as easily for the PIMCO Total Return mutual fund.
There is a downside of the new ETF, however, and it's this: Circumstances could change quickly for the worse if the markets were to become more turbulent. This new fund has only a short track record and, during the past two months, things have been relatively calm. "Things can change quickly in the bond market and the mutual fund's superior hedging capabilities could make a big difference in the months ahead," Strauts warns. He suggests that those who are currently invested in the mutual fund stay there "for now."
The other hot new ETF is the iShares Barclays U.S. Treasury Bond ETF (GOVT), also launched on Feb. 12. It is fully invested in U.S. Treasuries, with half of its total assets invested in just five holdings: U.S. Treasury notes at 2.375% (11.28% of holdings), U.S. Treasury notes at 1.375% (11.12% of holdings), U.S. Treasury notes at 4.25% (9.96%), U.S. Treasury notes at 4.5% (9.25%) and U.S. Treasury notes at 3.25% (6.77% of holdings).
Strauts also believes that the fund has the advantage of being all government issue, meaning that the default risk is "near zero." Of course, this means the yields are also relatively low compared to other bonds. Investors have interest rate and inflation risk, but could benefit in times of market turmoil as investors flock to safety.
Apparently a lot of investors are looking for just such a low risk-safe haven. This ETF has picked up $300 million in assets in only two months of trading. It tracks the Barclays U.S. Treasury Index, and boasts an expense ratio of 0.15%, which Morningstar's Strauts notes "is low even by ETF standards."
New ETFs, of course, have not been the only beneficiaries of increased investor interest in exchange-traded funds. Money has poured into more venerable issues, too. The biggest gainer, according to the BlackRock report, was the Vanguard MSCI Emerging Markets ETF (VWO), which offers exposure to emerging markets equities. It pulled in $7.041 billion in new assets through April 12. Also in the emerging markets ETF space was the iShares MSCI Emerging Markets Index Fund (EEM), which received $2.011 billion in new investor money through April 12.
Going with the trend toward bonds, three of the top five ETFs in terms of new invested assets were bond funds. They were the iShares iBoxx $ High Yield Corporate Bond fund (HYG), which garnered $3.991 billion in new assets under management, the iShares iBoxx $ Investment Grade Corporate Bond fund, (LQD), which took in $3.021 billion in new money, and the SPDR Barclays Capital High Yield Bond ETF (JNK), which received $2.783 billion in new investor money.
"We're continuing to see a lot of investor money moving into emerging market ETFs, and especially now into emerging market fixed income," BlackRock's Grancio says. "They're searching for yield and some of the countries in the developing world, like Brazil, for example, offer significantly higher yields than the developed market."
The report shows that as of April, 56.8% of ETF assets were in developed equity markets, 13.3% were in emerging market equity, 16.8% were in fixed income and 11.1% were in commodities. Among these categories, only European equity ETFs showed a net outflow of assets (down $5.9 billion to $86 billion) over the last four months. The biggest gainer over the period was North American equity ETFs, with a new $31.8 billion in invested assets, followed by fixed income, up by $25.5 billion.
Overall, the BlackRock report shows that the biggest ETFs remain the SPDR S&P 500 ETF (SPY), with $103.1 billion in assets under management (it's down $2.6 billion so far this year), and the SPDR Gold Trust ETF (GLD), with $68.5 billion in assets under management (up $1.4 billion to date this year). Rounding out the top five ETFs are the Vanguard MSCI Emerging Markets ETF (VWO), with $53.8 billion in assets, the iShares MSCI Emerging Markets Index Fund ETF (EEM), with $38.2 billion in assets, and the iShares MSCI EAFE Index Fund (EFA), with $36.5 billion in assets.
The top traded ETFs, according to the BlackRock report, were the long-time most active SPDR S&P 500, with $19.3 billion in average daily trading, followed by the iShares Russell 2000 Index Fund (IWM), with $4.0 billion in average daily trading, the PowerShares QQQ Trust ETF (QQQ), with $3.1 billion in average daily trading, the iShares MSCI Emerging Markets Index Fund ETF (EEM), with $2.0 billion in average daily trading, and the SPDR Gold Trust with $1.4 billion in average daily trading. Average trading volume in all ETFs has been running at about $61 billion for the last four months, down by over 50% from the peak of nearly $130 billion hit in August of last year.
The report shows that three providers continue to dominate the U.S. ETF market. The largest of these by an overwhelming margin, with 41.3% market share, is iShares, with $498.6 billion in ETF assets under management, an increase of 11.0% over 2011.
Second is State Street Global Advisors, with 23.8% market share and $287.3 billion in ETF assets under management, up 11.8% over 2011. Third place belongs to Vanguard, with 17.2% market share and $207.9 billion in ETF assets under management. Of the three big providers, Vanguard showed the largest gain, up 22.0 % over 2011.
Looking at the global ETF picture, it is clear that the vast majority of new investment this year to date has been in the United States and Canada. In those two countries, a total of $64.3 billion in new assets was invested in exchange traded products, representing 97% of the net new global investment in such investment vehicles of $66 billion over the first four months of this year. Compare that to Europe, where the net new investment in exchange traded products over the same period was just $2.2 billion. In fact, total U.S. and Canadian investment in exchange-traded products, which include both ETFs and exchange-traded notes, now stands at $1.26 trillion, compared to just $325 billion in Europe.
Meanwhile, exchange traded products showed a net outflow of $400 million during the first four months of 2012 in Asia, falling to $102 billion in AUM. In Latin America, where total assets invested in ETFs is just $11 billion, there was also a net drop of $200 million through April. Although inflow/outflow figures for the period weren't available for the Middle East and Africa, total investment in ETPs in that region is $21 billion.