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As ETFs Pass $1 Trillion In AUM, What Next?
Today's breach of the critical $1 trillion barrier by the Federal Reserve On/Offshore Genocide Opportunities Fund, LLC in its Treasury holdings is not the only important "trillion" milestone in the past few days. As was reported by the WSJ previously, total assets under management in the ETF space also passed $1 trillion for the first time ever, primarily courtesy of SPY, which added $11.6 billion (even as it continues to be the most shorted NYSE security in the world with 294.1 million shares short on 700 million total shares), and the IWM which saw $976 million in new assets. Granted, these numbers are just a little suspect, since according to the monthly Invesco PowerShares report, total ETF assets were still "just" $934.4 billion, but we will take Blackrock's word for it. And, considering that mutual funds, already at record low free cash levels, continue to bleed dry powder (32, and soon to be 33, consecutive weeks of outflows), and are saved from liquidations only due to levitating asset prices on this joke of a market which has absolutely no volume to it, many are trying to make the case that ETFs are rapidly becoming the next target of retail flows. Perhaps. Looking at the numbers this is certainly not as clear cut as those who specifically wish to see this, pronounce it as a fait accompli. Below we demonstrate that of the $96 billion in net flows YTD into various ETF styles, it is certainly not the case that equities are the pure beneficiaries of retail flows. That said, we present the thoughts of BNY's Nicholas Colas, who provides a useful reference guide on the history of the ETF business, and now that it has (allegedly) passed the trillion mark, looks at where the next trillion will come from (incidentally, it took the Fed four months to accumulate an incremental $250 billion in holdings; ETFs, on the other hand, as noted above, have seen inflows of $95.8 billion in all of 2010 - just wait until the Fed pulls a BOJ and starts buying the SPY openly instead of through Citadel).
First, we present the Year through November data per Invesco, which shows some materially different data than BlackRock:
Using simple math, which has still surprisingly not been made illegal by the government, nor has its borrow been pulled by State Street, when we subtract the contribution of foreign focused ETFs ($31.8 billion), and Fixed Income ETFs (31.1) billion, we get $32.9 billion. Then take out commodity funds, which invest in that damned gold thingy, which have seen $9.5 billion in inflows, global (non-US) specialty, currency and speculative leveraged ETFs, and you get a meager $15.5 billion. Compared to the $95 billion in outflows from domestic equity focused mutual funds YTD, and one can see why the numbers tend to not substantiate claims that ETFs are even close to replicating the retail desire for stock participation.
In other words, until we actually see a rotation from fixed income into equity products, we hope the peanut gallery can retain its enthusiasm until its claims are at least somewhat validated by facts.
And now that readers have been made aware of said facts, here is a primer on what may happen to ETFs, if all works out as expected, and the ETF asset class, which according to many (Zero Hedge certainly included), are nothing but synthetic CDO type instruments, whose operation in times of copious liquidity has been proven to be viable, yet which also according to many were instrumental in creating the forward feedback loops that were reponsible for the flash crash, an event which the market has forgotten so promptly that it is certain to recur as absolutely nothing has changed since then.
From BNY Convergex' Nicolas Colas:
The Judgment of Paris - Origins of the Next $1 Trillion in ETF Assets
Summary: Assets under management at domestically listed Exchange Traded Funds exceeded $1 trillion for the first time late last week, a notable event for this product. The inflows that put ETFs over the top were to traditional S&P 500 offerings, with SPY adding $11.6 billion and IVV posting $976 million in new assets last week. IWM (iShares Russell 2000) also saw inbound money flows, at $783 million. As the industry passes this important milestone, the logical question becomes, “Where does the next $1 trillion come from, and how long will it take?” There is little doubt that money chases performance, so the bedrock for significant growth is clearly a continuing move higher for risk assets. However, seven of the top 20 asset gathering ETFs over this year were fixed income/preferred offerings, meaning that any further back-up in rates will create a real headwind for this category. In the end we think the fundamental tug of war will be between increasing investor confidence (positive for assets) and larger asset bases at hedge funds, which tend to use ETFs on the short side (negative for asset growth).
I recently came across an article that referred to the “Judgment of Paris” and was surprised to read that this phrase evokes more than one meaning.
- According to the ancient Greek myth, the goddesses Athena, Hera, and Aphrodite asked a mortal man, Paris, to judge which one of them was the “Fairest.” Translation to today: Jennifer Aniston, Angelina Jolie, and Heidi Klum ask some middle aged fellow off the street to decide who is “Hottest.” Each goddess tried to bribe Paris with a gift: Hera - political power, Athena – wisdom and success in battle, and Aphrodite – his choice of the most beautiful woman in the world. The ancients knew a bit about male psychology, because in the story Paris chooses Aphrodite. He then steals Helen, considered the greatest beauty of the age, away from her husband. Cue 1,000 ships and the Trojan War.
- For wine lovers, the “Judgment of Paris” was a famous contest held in May 1976 in the City of Light. French wine experts did a blind taste test of several high-end French wines, comparing them to the best of California’s offerings. The New World vintages bested the French wines in every category. Going into the event, no one thought such an outcome was possible. Only the French correspondent for Time magazine was at the event – presumably it was a slow news day – and he got the oenophile scoop of the century as a result.
The world of money management has its own ongoing “Judgment” at the moment: is there further growth in the world of Exchange Traded Funds? The ETF industry celebrated something of a milestone last week, reaching $1 trillion in assets under management for the first time. The abandoned husband, to borrow from the ancient story, is the mutual fund industry. Consider the brief sketches of each type of investment below:
- Mutual funds are still the 800 pound gorilla of the industry. Their popularity goes back to the 1980s stock market boom, and assets under management are $11.5 trillion for U.S. registered funds. They are still the investment vehicles of choice for domestic investors in important categories such as retirement planning (401ks, IRAs and the like). Stock funds hold almost half the assets, at $5.3 trillion, with money markets ($2.5 trillion) and bond funds ($2.2 trillion) the other popular fund types. Unlike the growth trend we noted earlier, however, mutual funds have yet to reach their old highs in terms of AUM, which was +$12 trillion in 2007.
- ETFs are the new(er) kid on the block, their initial popularity stemming from the 1990s stock market rally. Even with AUM reaching $1 trillion for the first time last week, this product is still less than 10% of the size of the mutual fund complex. The weighting in ETFs skews towards equities more than mutual funds, with $736 billion in assets. Fixed income products weigh in with $136 billion, and commodity products at just over $100 billion.
Even with the continuing success of the product, I know from conversations with ETF sponsors and written commentary by industry watchers that there is some concern about the vectors for the next leg of industry growth. In my opinion, the ETF industry’s basic structure is sufficiently different from mutual funds that the issue is more complex than many may realize. Simple notions of investor confidence simply don’t tell the whole story.
First, mutual funds and ETFs differ in some important ways:
- Incremental demand for mutual funds always creates new shares and new assets under management. This happens once a day, after the market closes as fund administrators and accountants tally up the day’s redemptions and purchases. “Long sales” are balances against “long buys” and the difference creates an inflow or an outflow of capital.
- New demand for ETFs also nets out against share sales, but this happens in real time, and with one notable additional source of shares. ETF shares are also marginable – mutual funds generally are not – so supply can come from short sales as well as holders who own shares and wish to sell. Consider that the SPY has 294 million shares short as of last count. Those are shares that trade in addition to the approximately 700 million shares issued by the fund sponsor. Under unusual circumstances the shares short count can actually exceed shares outstanding, as I will shortly describe. ETF sponsors therefore monitor trading in their funds to ensure that daily activity does not disrupt the settlement process.
There has been some controversy on this point in recent months, especially as a few smaller ETFs have outsized short positions relative to shares outstanding. I am the first to agree that the optics of that situation are poor, to say the least. For example, the XRT ETF, dedicated to retail stocks, has 63 million shares short and about 20 million shares outstanding. But the bottom line is that ETF issuers track share create/redeems and shares outstanding on a real time basis and are acutely aware that this issue exists. Could they get caught out in a fast moving market in a highly volatile sector? Perhaps. But those events seem to only occur in rapidly declining markets and any forced mass creation of ETF shares would provide billions of dollars of buyside orders for the underlying stocks in the ETF. In an odd way, therefore, the short ETF issue I describe here acts as a market stabilizer, though this phenomenon is as yet largely untested in real world conditions.
It is only a mild oversimplification to say that hedge funds tend to use ETFs on the short side and retail investors provide the net demand. I don’t have any hard numbers to prove that contention, mind you – just years of buyside and sell-side experience watching how these constituents use the products. Despite the name, many hedge funds are long-biased, searching for names to own – be it for 10 seconds, 10 minutes or 10 months. The other side of the trade is often an indexed ETF, with the difference in performance between the long individual stock position(s) and the short ETF meant to create the alpha (outperformance) of the investment. Wonder why that heavily shorted ETF I mentioned above happens to track retail stocks? That happens to be, along with technology, one of the most widely traded sectors among hedge funds.
Net new demand in this paradigm comes more from retail investors, looking for targeted, low cost investment vehicles. The primary types of hedge funds we can envision being structurally long ETFs are short-biased funds, who use the product in the same way as their long-biased brethren, but in reverse. The two exceptions are precious metals funds like gold sector market leaders GLD and IAU, which offer rock-bottom fees, and hedge funds that specialize in macro bets.
If you think that assessment is reasonable, then the continued growth in ETF assets is essentially a tug of war between hedge funds and retail investors. Here is the framework for that observation:
- As retail investors grow more confident in a continued rally in risk assets, they will shift capital from cash to equity ETFs. Mutual funds have been laggingwith this constituency – there has not been a week of positive flows into U.S. equity mutual funds since May 2010, after all – but at some point even traditional mutual funds will see some pickup in retail investment.
The one caveat in the near term is interest rates. The dramatic back-up in yields over the past two months will continue if markets either grow more concerned about the ballooning U.S. budget deficit or more optimistic about economic growth and/or worried about rising inflation. Seven of the top 20 asset gathering ETFs for the year were fixed income/preferred stock offerings, and this leg of the ETF growth stool could buckle if rates move much higher.
- Growth in hedge fund assets dedicated to equity strategies is the other side of the growth coin for ETFs. As these investment vehicles increase assets to equity strategies, a portion of their short-side book will come from ETF short sales. This will come through as “supply,” dampening the demand for new shares.
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just buy the dip (assuming we ever see a dip again...)
I'm gonna dip my balls in it.
can I please be the one trillionth reply message on ZH?
Ok, the millionth would be great as well ...
FIAT Ponzi on Steroids: An Alchemist's Day Dream.
Thank you Tyler,
Now I know some of you probably thought I was kidding, and some of you probably think I am nuts, and probably some of you think really weird crap that even I don't want to know about. However, I was not kidding and I am not nuts about the Roach Motel [SPY] and the creation units machine that is turned on or turned off on any given day depending on where FBI agents are standing...which is why I spend most of my time these days in my closet under a pile of coats.
And so is it true for the XRT and so it is true for the VXX [which has a really super cool creation units machines that not only makes a derivative...but a derivative on top of a derivative]...and.....well....anyway...this is the criminal syndicate's sweetest and latest, greatest invention...and one of its most successful ones...and we all know how those things turn out, like portfolio insurance, and dotcom and MBS and CDOs and so on and so on.
OK, I know this crap is hard to wrap your head around, and quite literally I have severe brain damage after reading articles on this subject [so I do need someone else to pick up the yoke here]...but then again you don't really have to wrap your head all the way around it but, rather, all you need to know is that ETF crap should not be in your portfolio UNLESS a really nice criminal syndicate Wall Street banker can make you understand clearly how those sweet creation units machines WORK IN YOUR FAVOR. And when that business is done, at least for starters, then freakin' A...I think we are all there buyin' ETFs like they were white Iphone 4s. That's all I ask.
In the meantime, Wall Street criminal syndicate bankers are using those instruments to entirely distort an already entirely distorted market as they call on you, for example, to buy the XLF [which, btw, if you do not buy the XLF, the Roach Motel [SPY] will be in serious trouble very soon] so that they can cash $100 million in new bonus checks right before those creation units machines go kerplooee. Got it?
So as this creation units machine is turned on, those stocks are bought, and as this creation units machine is turned off, those stocks are sold...and you have nothing to worry about because this is Wall Street...and look again at those words above that were supposed to make you feel so nice and comfy as all was explained to you. Really, what could go wrong?
I suggest you get good and comfy under some coats in your closet, instead...'cause this story is coming, I tell you. Hello TIP OF ICE BERG.
Ah, the wonderful magic of the criminal syndicate known as Wall Street.
Bogle says that ETFs are the greatest marketing invention of recent years but lousy investments.
Paper claims which have already been leveraged on fractional reserve currency, which was fractioned on gold loans. It is one biig paper ponzi, how can it make monie, only the believers know. Too bad for me when I ask I am told, "Monie can be created out of nothing, now...we are beyond monie."
Amen. That's the truth.
So 2 more years of round robin ponzi guaranteed.
2012 it is...
Pretty much a buying panic in stocks.
What's up with all the volume in the Vanguard Total Stock Market ETF the last few days?
Obama was pissed his fund wasn't at its highs and called the NYSE and told 'em he wanted a rampjob in his equity funds. He is whishing he had bough Nike, CAT, SLW, and Hes this summer.
How about your coming up with a clever chart that illustrates the growth of the gross federal debt on top of one of those bullish stock charts of a broad index during the last several years. I guess $2.7 Trillion in deficit spending in the past two fiscal years has no consequences. The budget deficit in fiscal 2011 could easily surpass $1.5 Trillion. I guess that doesn't matter as well... so long as stocks go up.
http://ftalphaville.ft.com/blog/2008/06/23/13987/the-mad-market-of-zim/
Thanks, Cheesy Bastard.
When oil blows past $100 and food and gasoline prices surge, somebody might just pick up a proverbial pitchfork and stick in it The Ben Bernank's gob.
A 10ft. x 10ft. wall of sub woofers. Bad Boy Bill is mixing beats'''...
Jamie Dimon, Vikram Pandit are line dancing with Mark Zuckerberg and David Tepper.
Carl Icahn is moon walking, James Simons is running the bar with Doug Oberhelman ...
I have been exceedingly happy with the ETF products. I use them in my cash account - last 12 months GDX and GDXJ. I also put my 401k from layoff into Schwab's managed ETF product - in which they make active adjustments to your account within the main diversification buckets including PM's and real estate.
To help navigate the crazy interconnectedness of currencies, global economies and commodity prices I produced the following market visualization that ZH'ers may find useful if many of you are still investing in the rigged game...
http://capitalmarketmaps.com/etf
I keep trying to convince myself to buy an apartment in a self directed IRA instead of the managed ETF, but to-date have not.
Thanks for this outstanding forum Tyler.
Is there some reason you think the Fed will be required to stop their course of action? I, among others, have been skeptical of this activity. We have also observed the DJIA rally 5,000+ points in 21 months whilst the bears howl. The Ben Bernank doesn't appear to be listening to any naysayers that he must stop QE.
HAHAHA, NOT A FAT CHANCE IN HELL!!
Soon the US states and counties will default on which Benny B. will need to print more, More, MOre, MORE MORE MORE MORE MORE MORE MOREMOREMOREMOREMORE $$$$$$$$$$$$$$$$$$$$$$$$$
Sadly, The Ben Bernank may not stop this course of action until someone decides not to appoint him to the position the next time it comes up for appointment. He obviously doesn't seem to mind that commodities (and the real cost of survival) have rallied sharply... just so long as stocks go up. He will hide behind the CPI data and claim inflation is contained. I wonder if he actually cares anything at all about the reality of regular people choking on higher costs. Wall Street sure loves him.
http://finance.yahoo.com/news/Goldmans-ONeill-Sees-2011-as-cnbc-30053426...
Anyone remember this old song from 1965, "They're Coming to Take Me Away-Haha!" Maybe it should become our new National Anthem:
http://www.youtube.com/watch?v=l-lJZiqZaGA
Or another candidate for new National Anthem, "Wipeout."
http://www.youtube.com/watch?v=MoPzjWjBZNY&feature=fvst
We'll have to wait and see if we get a confirmed breakout in some of the Asian indexes the next day or so:
Even CNBC is airing apocalyptic news since we broke the barier:
Wave of Muni Defaults to Spur Layoffs, Social Unrest
http://www.cnbc.com/id/40769692
Well, it makes sense if Jim Sinclair's prediction of an "event" by Jan 14th has any merit. As soon as the books are closed on 2010, all bets are off.
"Using simple math, which has still surprisingly not been made illegal by the government"
1+1=?
the word quadrillion is being passed around like million was in the 90's and billion was around 2000
so lets go for quadrillions?
the numbers are so big people have lost all tangible mathematic connection to the figures anyways, so whats another 3 zeros?
im socially conditioned for it, lets go!
Sadly for them (TPTB) all their fiat gains are illusions (this is what likely gives them nightmares) … so yah, add 3, 6, 9, 12 zeros to the debt, it makes no difference … it’s all fiction anyways.
Many brokerage houses like TD Ameritrade and Schwab now offer commission-free trading for many ETF's.
Pretty soon, stock trading will be universal and widespread, with many people trading stocks 24/7 on their PDA's.
I bet that many of the most liquid ETF's will be able to be traded nights and weekends soon.
But that will only happen when some of the $250 billion in sports betting money gives up on trying to beat the Vegas odds and they start getting herded over to the NYSE casinos...
A casino is a casino...if you default on Vegas they kill you and if you default on the government they give you more money...
Maybe RoboTranny is right...
US financial markets are a casino...trust me, I worked in Casinos for years (follow link for a pic of me dealing at HRH in the 90's): http://exploitthemarket.com/blog/299/resistance-is-futile/
Illegal math skills, go figure, no wait.
To find out more about the Imminent Collapse of the Global Economy, watch this video "Who Cares ~ What Could Possibly Go Wrong ??" at (http://www.youtube.com/watch?v=tTRxN73Iu5M).
by Anonymous
The United States economy is rotten at the core and has been stolen from the American people by the Wall Street Thieves that drove the Titanic into the iceberg in the first place!!
I care
Right now, we are in the midst of one of the greatest stock market rallies in 10 years. We've actually made back more ground at a faster pace than 2003 - 2007.
So for all the perma-screechers yelling "This can't go one, any minute, I swear!!":
Robo,
agreed, market is flying.
If only it didn't take a near tripling of our national debt from '00 to '10 against less than a 50% increase of GDP, the bankrupting of pensions, the criminal accounting, blah, blah to accomplish it I'd be more excited.
Also, forgot to mention...fuck off from those who care more about a future for our kids than lining our pockets as part of the criminal enterprise that is the "stock market". Oh, but somebody ought to profit from (and cheerlead for) the destruction of America...you are a wonderful person Robo.
Zimbabwe, bitch!
… there, I fixed it for yah. As for the rest of the message …Touché Robotraitor.
OT but can someone tell me why the 2X & 3X funds track the underlying target so poorly beyond 2-3 days running? I know they are all derivative based, but why do they track so poorly - thanks
Many of those ETF's are just synthetic creatures, which makes me think what will happen when everbody moves to them? Probably Benny boy will have to buy only 2 or 3 shares of some companies, to move market to his liking. Brilliant! It reminds me of group of Vietnamise workers, I knew, sitting, during their lunch, on the curb of the rather low traffic street and betting on color of the next car passing by.
As Robo's says they will trade them 24/7 because it's just betting on car color or rather Ben's preference at given time, it does not have anything to do with economic background at all. Maybe that's why Vegas is going slowly down, you have casino all the time, you choosing your stakes and you have much bigger choice of games.
There's always a pump n dump somewhere.
.
i'll tell you what's next. ETFs are the latest craze and they will fade and/or crash like all of the latest investment crazes do; they may survive but they will not thrive. the leveraged ones and the ones that are supported by derivate buying and selling will crash due to physical delivery demands or borrowing/hedging constraints, causing animus towards the whole group, even the prudent variations. they'll be the future closed-end funds - interesting for the few 'nugget diggers,' but ignored by the masses.
I can see trouble ahead,moonlight,music,romance,lets buy the SILVER and dance .............. Lets get Physical,Physical oh yeah,baby,baby..........
Stay Cool,buy Silver,take down a bank,its your Patriotic duty,baby .........oh yeah !!!
Summation Index at a key inflection point.
Should know the next direction soon, up or down.
"All Hail the Mighty POMO."
"Malt ale."
Aren't the ETFs and their underlying earnings valued in safe western fiat currencies?
Yes... we have no bananas.