Summarizing 2010 ETF Outflows

By now it is no secret that US investors have said no mas to mutual funds investing in domestic stocks. Zero Hedge has consistently been demonstrating the outflow (now in its 19th straight week) from domestic funds. Yet some continue to hold hope that this is merely a rebalancing out of "old school" investment vehicles into the synthetic CDO family for the post-Lehman generation that are ETFs. Well, let's take a look at that shall we - the results may surprise you.

According to the latest monthly PowerShares ETF summary report, we find that for the month of August alone, that argument falls flat on its face: "Investors pulled $3.2 billion out of ETFs in August bringing the YTD flows to positive $45.8 billion." Fair enough, but there is still $45.8 billion in ETF inflows YTD one could say? Surely this at least partially offsets the $65 billion in mutual fund outflows?


Below is a composition of all the funds by product type focus that have seen either inflows or outflows year to date.

As is more than obvious from the chart above, the one biggest beneficiary of flows into ETFs was the Fixed Income type of ETF. In other words, instead of putting their money into fixed income focused mutual funds, some investors chose to do so via ETFs. Yet with inflows of well over $200 billion YTD in plain vanilla mutual funds, does that not also immediately refute the thesis that ETFs are now perceived as a better vehicle to invest than plain vanilla funds? Surely if that were the case this number would have been orders of magnitude greater. Perhaps investors are once again not that dumb, realizing all too well, that ETFs are nothing than synthetic vehicles which very much like the CDOs of yore will be the first to get carted out the door feet first during the next major flash crash.

More importantly, however, one can eliminate the impact of the Fixed Income contribution to ETF flows. Just as one can remove the contribution of Commodity and Currency funds, both of which net out to $5 billion. And while continuing to normalize, one should most certainly adjust for the Leveraged funds, which are nothing but a daytrader's product, and which have no utility from a long-term investment perspective due to their huge embedded theta.

So that means there are about $6 billion in ETFs that can be roughly attributed as equity-related. Yet of this $6 billion, there are flows of another $17.5 billion going into ETFs that track global markets (and not domestic). Which makes sense. Because as the line in the chart confirms, flows to pure equity strategies and domestic equity-related ETFs was....-$16.2 billion YTD. That's right: the withdrawal from domestic equity mutual funds, a proxy for the loss of investor confidence in both market structure and the prospects before US stocks is mirrored perfectly in the ETF universe.

So the next time someone tells you that mutual fund flows are simply moving out of funds and into ETFs, fell free to tell them they are wrong.



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