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Don't Be (April) Fooled: New ETF Money Flows Still Bond-Bound

Tyler Durden's picture




 

With the first quarter of 2012 just about in the books, Nic Colas (of ConvergEx) looks at how the Exchange Traded Fund “Class of 2012” has done in terms of asset raising to date.  There have been 82 new ETFs listed thus far for the year and they have collectively gathered $1.1 billion in new assets through Wednesday’s close of business.  While 63% of those funds have been equity-focused, fully 67% of the asset growth for the year has flowed into fixed income products.  Just over half the total money invested in these new funds has had two destinations: the iShares Barclays U.S. Treasury Bond Fund (symbol GOVT, with $297 million in flows) and Pimco’s Total Return ETF (symbol TRXT, with $267 million in flows).  The standout new equity funds of 2012 in terms of flows are all iShares products – Global Gold Miners (symbol: RING), India Index (symbol: INDA) and World Index (symbol: URTH).  Bottom line:  even with the continuous innovations of the ETF space, investors are still targeting international and fixed income exposure, a continuation of last year’s risk-averse trends.

 

The April 1985 edition of Sports Illustrated carried an article by renowned author and fabled sportsman George Plimpton about a promising young recruit into the Mets baseball organization named Sidd Finch.  He had a smoking hot fast ball – 168 mph by some counts, and accurate. Raised an orphan in England, he had travelled to Tibet to learn at the feet of the great yogi masters of the age.  His preferred equipment included a hiking boot on one foot, the other being bare.  The only wrinkle to the story was that Sidd also had a passion for the French horn and couldn’t decide which career path to take.  If you are curious, Plimpton’s story is reprinted here:  http://sportsillustrated.cnn.com/vault/article/magazine/MAG1119283/1/index.htm.

As you can likely surmise, the whole story was an elaborate April Fool’s joke.  It did manage to suck in quite a few sports fans, however, with the magazine getting over 2,000 letters from the general public anxious to hear more about this new sporting phenomenon.  It goes down in history as one of the most successful April 1st gags of all time, alongside the ‘Taco Liberty Bell’ (Taco Bell buys Philly landmark, renames after self, 1996), NPR’s announcement that Nixon was running for President again (1992) and the story that the Alabama state legislature had revised the value of Pi to 3.0, “It’s Biblical and therefore correct value” (1998).

Jokes in general, and especially gags like these, are amusing because they manage to jump out ahead of our ability to reason.  When our conscious mind catches up, we laugh that we missed the ruse the whole time.  Or others laugh at us…  Either way.  But I often reflect on the fact that jokes are funny for exactly the same reason that investing is so difficult.  It is just way too easy to fall behind the narrative and miss important facts until the punch line is hard upon us.  Great in comedy, tough for managing capital.

I spend a lot of time looking at the world of U.S. listed Exchange Traded Funds as a heuristic to tap into the collective minds of retail and institutional investors and (hopefully) stay a little ahead of the curve.  I don’t think it exaggerates the facts of the case to say that ETFs are currently the most innovative corner of the investment management world.  Sponsors regularly add new products to their offerings and seeing which ones garner investor attention is essentially like watching the financial version of a nature show.  Some of the young gazelles grow quickly and learn to elude the predators.  And some fall by the wayside.

The first quarter of 2012 has been an especially active period in the “ETF Ecosystem,” as I like to call it.  A few datapoints:

  • As of Wednesday’s close ETF sponsors had added 82 funds/products year to date, bringing the total to 1,435.  Sixteen funds have been delisted so far in 2012.  All data presented here, by the way, comes courtesy of www.xtf.com, which is our (and a lot of other ETF watchers) go-to source for data on the industry.
  • Those 82 funds have pulled in a total of $1.1 billion in new assets for the year-to-date.  The total amount of ETF assets under management is $1.2 trillion.  Total net inflows into the space are $56.7 billion, so the new crop of 2012 ETFs are really a small part of the overall fund flows picture for the industry.
  • Fifty two of the 82 funds opened in 2012 focus on equity investing, with 16 pointed at the debt market, 9 targeting commodities, and the balance in multi asset class/other.
  • New fixed income funds pulled in $745 million in Q1 2012; equity funds garnered $310 million.
  • The “average” new fund pulled in $13.6 million in capital this quarter, with the median money flow observation at $5 million.  Of course, with introduction spread out over the course of the quarter, this is really more like half six weeks of flows on average, rather than 3 months.

 

The real value of this information comes in analyzing where all this money is going.  For example:

  • Half of the aggregate money flows for the quarter ended up in one of two funds.  The AUM asset gathering prize for a new fund year-to-date goes to the iShares Barclays U.S. Treasury Bond Fund (symbol GOVT), with $297 million in the door since its launch on February 24th.  The Pimco Total Return ETF (symbol TRXT) runs in second place, with $264 million in new capital since its launch on March 1st.
  • In the list of the 82 funds added this year there is a wide variety of investment options.  Leveraged products, equity products, commodity products and the like.  And yet the two that killed it in terms of asset gathering are straight up bond funds.
  • GOVT is a plain vanilla U.S. Government bond fund, with a weighted average maturity of 7 years and an effective duration of 5.4 years.  Management fee: 15 basis points.
  • TRXT is an actively managed product, still somewhat of a rarity in ETFs, with Bill Gross running the book.  Effective maturity of 7.1 years and effective duration of 5.1 years make it look like the GOVT portfolio, but Gross owns a much wider swath of the fixed income rainbow of products – agencies and corporates, for example.  Current management fee: 55 basis points.
  • The correlation between inception-to-date performance and money flows is essentially zero.
  • Moving down the list, the top of the 2012 class for equity funds are three iShares products, each pulling in +$20 million year to date.  They focus on global gold miners (symbol: RING), India (symbol INDA) and a world index (symbol URTH).  Also worth noting – a new short term high yield fund from SPDR (symbol SJNK), which is off to a strong start with $48 million and an emerging markets corporate bond fund from WisdomTree (symbol: EMCB, with $60 million in new assets since its launch on March 8th.

To finish on what is likely the most provocative point, this quarter’s money flows into newly launched exchange traded products reveals a strong “Risk Off” investment bias.  That might go counter to the whole “ETFs destabilize markets” theme making the rounds, but the numbers are the numbers. Investors have an ever-broader menu at the “ETF Café,” but they seem resolutely firm in their desire for a turkey club and a cup of coffee.  They aren’t jumping all over the leveraged products, the short-biased offerings, or other esoteric categories.  Sure, those products are getting $5-10 million in new capital, but in a world where ETFs now control $1 trillion, that is pretty small change.    Just because they are out there doesn’t mean they are getting the biggest chunk of the flows. 

 

 

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Fri, 03/30/2012 - 09:08 | 2303167 Jim in MN
Jim in MN's picture

NY Times on the Fukushima disaster, which is not going well.

http://www.nytimes.com/2012/03/30/world/asia/inquiry-suggests-worse-dama...

 

The internal investigation also found current radiation levels of 72.0 sieverts inside the drywell, enough to kill a person in a matter of minutes, as well as for electronic equipment to malfunction. The high readings could be a reflection of the low water level, since the water acts as a shield against radiation.

The high levels of radiation would complicate work to locate and remove the damaged fuel and decommission the plant’s six reactors — a process that is expected to take decades.

Cleanup will probably require flooding the inner reactor vessel and lowering tools into it to scoop up parts of the radioactive rubble. That strategy worked well at Three Mile Island after the 1979 accident there. But at Fukushima, the reactor vessels are known to have cracked, because they were overpressurized. Filling them with water would be difficult, unless the surrounding drywell can also be filled.

The fact that the drywell at No. 2 has so little water could mean that technicians will need to develop a new technique. “With levels of radiation extremely high, we would need to develop equipment that can tolerate high radiation,” Junichi Matsumoto, an executive at Tepco, said Tuesday.

****

“The plant is still in a precarious state,” said Kazuhiko Kudo, a professor of nuclear engineering at Kyushu University in southwestern Japan. “Unfortunately, all we can do is to keep pumping water inside the reactors,” he said, “and hope we don’t have another big earthquake.”

Fri, 03/30/2012 - 10:33 | 2303416 Dr Benway
Dr Benway's picture

The disaster is not going well, you say?

Tue, 06/05/2012 - 09:33 | 2495589 Nagelstudio
Nagelstudio's picture

Das kannst du doch garnicht beurteilen. Es gibt verschiedene Gutscheinportale, auch www.gutscheine-blog.com hat schon gezeigt, dass verschiedene Kaufhäuser und Onlineshops wirklich krasse Rabatte und kostenlose Gutscheincodes verteilen.

Fri, 03/30/2012 - 18:38 | 2305154 DorseyCecil68669
DorseyCecil68669's picture

my friend's aunt makes $72/hr on the internet. She has been without work for six months but last month her payment was $19183 just working on the internet for a few hours. Here's the site to read more .....  http://lazycash9.com

Fri, 03/30/2012 - 09:22 | 2303168 GetZeeGold
GetZeeGold's picture

 

 

We won't get fooled again.

 http://www.youtube.com/watch?v=4ufa-q7DcWM

 

oops.....

 

Fri, 03/30/2012 - 09:09 | 2303172 GMadScientist
GMadScientist's picture

Is there a primary difference between an ETF and a money-launderer?

 

Fri, 03/30/2012 - 09:16 | 2303195 LawsofPhysics
LawsofPhysics's picture

well in the old days a money-launderer had physical cash, whereas the money in the ETF is digital and can be vaporized at any time.

Fri, 03/30/2012 - 09:18 | 2303200 GetZeeGold
GetZeeGold's picture

 

 

Depends what your definition of is.....ummmm.....is.

 

Fri, 03/30/2012 - 09:14 | 2303189 Dr. Engali
Dr. Engali's picture

With the risk reward of bonds right now I'd say those bond buyers are going to get skewered. They will one way or another..either when the bond bubble cracks or inflation eats what little return they are getting.

Fri, 03/30/2012 - 09:18 | 2303202 mendigo
mendigo's picture

Please someone explain: Why do ETFs destabilize markets?
Thanks.

Fri, 03/30/2012 - 10:50 | 2303393 GMadScientist
GMadScientist's picture

Focused risk. Diluted NAVs. Momo magnets. Take your pick.

If someone is offering you a zero commission trade, it's for a reason.

Call it the Bagholder Express.

Fri, 03/30/2012 - 09:18 | 2303203 SheepDog-One
SheepDog-One's picture

Nic Colas? I dont trust thats a real name, may as well named himself Ben Dover.

Fri, 03/30/2012 - 09:23 | 2303215 Dr. Engali
Dr. Engali's picture

Or maybe Richard Head....wait he's already on the forum.

Fri, 03/30/2012 - 11:03 | 2303533 Common_Cents22
Common_Cents22's picture

is there a Mike Hunt in the house?   or Dick Trickle?  what mean parents would name their kid Richard with a last name like Trickle anyway?

Fri, 03/30/2012 - 09:27 | 2303235 slewie the pi-rat
slewie the pi-rat's picture

he certainly doesn't understand why people "laugh"

maybe he's spent his life studying pies

Fri, 03/30/2012 - 09:51 | 2303300 Catullus
Catullus's picture

Oh Bond ETFs. I can't think of a worse investment. The banks are going to stuff these things full of garbage debt instruments as they dash for the exits.

Fri, 03/30/2012 - 10:57 | 2303521 Schmuck Raker
Schmuck Raker's picture

"...ETFs are currently the most innovative corner of the investment management world."

Alarm bells should be going off in everyone's heads right about now.

Fri, 03/30/2012 - 11:27 | 2303602 I should be working
I should be working's picture

Price is inversely correlated to supply and correlated to demand.

Companies are buying back shares, eg. supply is declining and demand is low.

I would be more worried if Joe-sixpack were buying with both fists.

Fri, 03/30/2012 - 14:17 | 2304264 suckerfishzilla
suckerfishzilla's picture

I would take the lump sum and buy Silver. 

Wed, 04/04/2012 - 20:26 | 2318060 Stax Edwards
Stax Edwards's picture

BlackRock is staking its reputation on these ETF's, not to 'sophisticated investors' but to retail mind you.  I think (hope?) it can be done right.  If BlackRock TVIX's the Muppets, heads will roll by god.  I am of the opinion LF is trying to create viable options for retail to express their market views.  If they go the way of the CDO3 Larry is gonna get the noose and I don't mean maybe.  He will have no leg to stand on if he rapes the population once they have waded back into the markets via his huge marketing campaign (for the Vanilla stuff I think it is solid).  That being said he is well aware of that and stands to gain immensely with success of the products or to create another dark cloud over the street.  Being that retail is on the hunt for ETF's they need a simplistic flag system or something where there are say three tiers.  Maybe green yellow red with respect to reasonable hold time.  When I saw order flow lit up to buy TVIX on the huge dip I cringed.  Yikes!  Anyone still knee deep in Credit Suisse's line of ETF's needs to have their head examined.  Ooops.

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