July ETF Update

According to the most recent Powershares ETF update total assets in U.S.-listed ETFs were up 6.0% in July, or $51.7 billion, to $825.1 billion. Total ETF assets are up $32.4 billion since the beginning of the year (4.0%) which is greater than the 1.2% decline in U.S. equities and the 3.2% decline in global equities. Looking at flows, investors added a total of $9.2 billion into ETF in July. For the year, ETFs have seen net inflows of $48.5 billion. This roughly offsets a comparable number in mutual fund outflows YTD, which according ot ICI is approximately $50 billion. Oddly enough, the two of the most popular ETFs in the world, the SPY and the GLD, both saw material net outflows in July (-$1.9 billion and -$1.4 billion, respectively). On the flipside, the funds seeing the largest inflows were the Vanguard Emerging Markets (+$2.0 billion), and the IWM, also at +2.0 billion. Not surprisingly, the strategy with the biggest inflow by investment objective was Fixed Income, with $5.1 billion in inflows in June, followed by Global Region/Country at $4.7 billion, and US Sector/Industry with $1.6 billion of inflows. On the other end, Commodity, US Style and US Market Cap ETFs saw the largest ouflows (-$1.5 billion, $0.9 billion, and -$0.4 billion).

Chart 1 - ETF Assets and net flows by provider

Chart 2 - Fund flows by investment objective

Chart 3 - 10 ETFs with largest inflows:

Chart 4 - 10 ETFs with largest outflows:

Some other observations:

Mutual fund managers use ETFs extensively within their own funds. This may come as a surprise given that ETFs often compete with traditional mutual funds. The liquidity, tax-efficiency, transparency and low-cost nature of ETFs,† however, has led many mutual fund managers to embrace the investment vehicle. Columbia Management Investment Advisers is the largest user of ETFs among mutual fund managers, followed by BlackRock, State Street and Wellington. The largest ETF positions within mutual  funds are emerging market and U.S. equities.6 Columbia Management Investment Advisers holds nearly 11% of all of its assets in ETPs across 596 different funds.

Over 25 different pension funds for some of the largest states and companies have begun using ETFs in their portfolios. The leader has been the Teacher Retirement System of Texas, which currently holds nearly $4 billion in ETFs providing exposure to emerging market equities, real estate, small-cap equities and commodities. Dow Chemical, U.S. Steel, IBM, DuPont and Exxon also use ETFs within their pension portfolios.

Many endowments have also begun using ETPs to gain exposure to various asset classes. Harvard University, which has one of the most respected and best performing university endowments is the leader within this group in its use of ETFs. Currently Harvard holds over $1.2 billion in emerging market equity ETFs. Harvard invests some of its assets in broad emerging market funds but uses single-country ETFs heavily to achieve more precise emerging market exposure. University of Texas, University of Notre Dame, Stanford University, the Massachusetts Institute of Technology and Yale University all use ETFs within their endowment portfolios.

And some very interesting observations on hedge fund holdings in ETFs, which have a net ($56) billion short position in ETFs: Hedge funds use ETFs for both long and short exposure. Collectively, hedge funds manage  approximately $21 billion in long ETF positions and to around $77 billion in short ETF positions. Most of the long hedge fund exposure within ETFs is concentrated in commodity funds. In addition, some of the largest single positions in ETFs come from hedge funds. For example, Paulson & Co. has over $3.5 billion of gold exposure from one ETF.