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