ETF fund flows have been a uniformly positive source of capital into U.S. risk markets in 2012. Looking a little deeper at the decidedly 'risk-on' flows, Nic Colas (of Convergex Group [12]) notes perhaps their most provocative feature has been their high degree of net concentration. When you look at the entire “ETF Ecosystem” of listed funds, just 6 funds represent all the net gains in assets over the past month ($5.4 billion in net inflows) – LQD, HYG and JNK in fixed income, VWO in emerging markets, VXX in risk, and GLD in commodities. With 1,433 different ETFs listed on U.S. markets now, Colas likens the comprehension of the $1.2 trillion in AUM across these ETFs to how well you know your spouse as we know ETF flows are important (just like a wedding anniversary date or what day the trash is picked up at home) but with their still-evolving proliferation it seems a daunting task to keep tabs on them.
The Stranger Beside You – Spouses and ETFs
Summary: ETF fund flows have been a uniformly positive source of capital into U.S. risk markets in 2012: $39 billion of new cash overall, with equities up $20 billion and fixed income flows at +$13 billion. Commodity ETFs make up most of the balance, with $5 billion in new capital thus far in 2012. Looking a little deeper at the flows, perhaps their most provocative feature has been their high degree of net concentration. When you look at the entire “ETF Ecosystem” of listed funds, just 6 funds represent all the net gains in assets over the past month ($5.4 billion in net inflows) – LQD, HYG and JNK in fixed income, VWO in emerging markets, VXX in risk, and GLD in commodities. Over the year to date, 35 funds (out of 1,433 in total) represent all the new “Net” monies. The direction of this marginal capital is “Risk On,” if by degrees. Fixed income is still the largest chunk, at 29%, followed by foreign equity (28%) and domestic equity (17%). Other winners include Commodities (+6%) and Leveraged Products (+4%).
[13]
How well do you know your spouse or significant other? Could you pass one of those U.S. Immigration and Naturalization Service interviews, where the government seeks to confirm that you are ‘Really’ married, rather than getting paid to help a non-citizen stay in the country? Courtesy of an article from The New York Times a few years back, here is a sample of actual questions asked during live interviews by an INS official:
- On the day of your wedding, where did you wake up? What about your spouse?
- Are you paid weekly, every two weeks or twice a month? How about your spouse? (And, of course, does your supposed spouse know the answer to this about you?)
- When you first met your now-spouse, who spoke the first words?
- Where do you keep your clean underwear? What about your spouse? (And does your spouse answer correctly about you?)
- What is the name of your spouse’s manager at work?
- What day is the trash picked up at your house?
Of course, even genuinely married couples have their memory lapses. Men who forget anniversaries or that they’ve already given something as a present before. Women who forget…. Well, they must forget something. The point is that familiarity may not necessarily breed contempt as much as a somnambulant partial memory.
That’s something like I think many market observers treat the world of Exchange Traded Funds – we know they are important to understanding capital flows, but with their still-evolving proliferation it seems a daunting task to keep tabs on them. There are, after all, some 1,433 different ETFs listed on U.S. markets, with 64 new ones (net) introduced in 2012 alone. As of Wednesday’s close, ETFs had $1.2 trillion in assets under management, with net inflows of $39 billion to date in 2012. Thus far in the year, total AUM is actually up $115 billion with the generally positive performance of capital markets.
[14]
That inflows number is what gets the most attention, in that it is a useful proxy for where capital is moving at any given time. ETFs have been the most constant source of new money – notably into U.S. stocks – for several years, especially as compared to mutual funds. Consider that thus far in 2012, mutual fund managers have seen $22 billion in outflows from domestic equity mutual fund products, only partially offset by $4 billion of fresh capital into foreign equity funds. Compare that with the $20 billion of new money into equity ETFs thus far for 2012, and it is easy to see that ETFs are adding to available capital at a faster rate than mutual funds are shrinking that same pool of money.
But the problem of proliferation when it comes to analyzing ETF money flows persists for market observers, especially as the industry continues to answer investor demand with new products. How do we think about the spate of recently announced volatility-target funds, such as iShares MSCI Emerging Markets Minimum Volatility Index Fund (symbol EEMV, just to call out one product that fits this new approach)? Or Index IQ’s plans to launch a physical diamond fund? Or the recent successes in asset gathering for the ProShares and VelocityShares and iPath volatility products. You get the idea – it is easy to feel like a forgetful spouse rushing to buy an anniversary present.
[15]
There is a “Brute force” way to look at fund flows, and it centers on the fact that a fairly narrow band of ETFs actually get the bulk of the marginal capital flows at any time. For example, take a look at the money flows for the last month in ETF land. Literally hundreds of funds gained assets, and almost as many lost some capital. But if you look at the $5.4 billion of fresh capital that made its way into ETFs in the last 30 days, you can summarize where that money went with six funds. Here are some details:
- Two large fixed income ETFs – iShares iBoxx High Yield Corporate Bond and iShares iBoxx Investment Grade Corporate Bond – raked in a combined $1.6 billion.
- The SPDR Gold Trust – GLD – received $957 million in fresh capital.
- The SPDR Barclays High Yield Bond ETF got $829 billion in new money.
- In emerging markets, the Vanguard MSCI Emerging Markets fund saw $1.2 billion in new capital.
- The iPath S&P 500 VIX Short Term Futures ETN saw $845 million in new money in the last month, adding well over 50% to its capital base.
So there you are – with six names you can tell the tale of the tape in the last month. Even at low interest rates, there is still ample demand for corporate debt. Investors still feel plenty of apprehension even four months into the most recent up move from the October lows – cue the gold and VIX investments. And emerging markets, with their higher betas, get the nod as well. Risk on, as the saying goes, with a side of risk hedges.
[16]
This same approach works for the year-to-date, with 35 funds essentially capturing all the marginal capital added through ETFs (that $39 billion we mentioned earlier). We’ve included several tables and charts, with data courtesy of www.xtf.com [17] (an excellent resource for all things ETF-related), to highlight the following points:
- The largest incremental investments year to date through ETFs have been in fixed income (29% of marginal demand), foreign equity (28%) and domestic equity (17%).
- This indicates that investors have grown a little more cautious as the year has progressed, since fixed income marginal flows were 42% over the past month, and foreign equities were 19% of the “Net” flows.
All in all, this brief analysis points to more of a pause in investor sentiment rather than the opening for a more full-blown correction in the coming weeks. ETF buyers – who are both retail and institutional players at the end of the day – aren’t really pulling in their horns just yet. And yes, these flows also represent demand from hedge funds to provide short positions, so I wouldn’t paint higher asset levels as uniformly bullish. But there is no denying that ETF fund flows continue their steady drip-drip-drip higher, on the back of better overall capital markets performance.