US ETFs Inflows Could Hit a Record in 2012

Investors lock in profits in high-yield bond funds and increase flows to government-bond funds.

Michael Rawson, CFA 31.12.2012
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Exchange-traded funds attracted $15.6 billion in net inflows during the month of November, bringing the year-to-date total to $154.0 billion, on pace to match 2008’s record-setting year. Flows in 2012 have been dominated by taxable-bond ETFs, which saw an additional $3.9 billion in new capital added in November, bringing total net inflows for the year to date to $48.0 billion, surpassing any previous year. International-stock ETFs also saw strong inflows last month, attracting $5.2 billion in new money for the month of November.


Positioning for the "Fiscal Cliff"
Investors may be locking in profits after a strong runup in high-yield bonds and positioning their fixed-income portfolios for heightened uncertainty as we head towards the "fiscal cliff." After seeing strong inflows earlier in the year, high-yield bond ETFs saw outflows for the second-straight month. Meanwhile, investors sought the perceived safety of Treasury bonds, as the long-term government-bond and intermediate-term government-bond categories added $600 million and $774 million, respectively. 

Elsewhere in the fixed-income space, emerging-markets bond ETFs gained net inflows of $774 million in November, bringing the year-to-date inflows into this category to $5.4 billion, an impressive total considering the fact that the category had just $7.0 billion in assets at the start of the year. In response to strong investor interest, providers have launched 12 new emerging-markets bond ETFs in the past two years.


The median level of assets in the 95 ETFs that have closed so far this year was just $4.8 million. In comparison, the 169 new launches in 2012 have total assets of $8.4 billion, or a median of $7.7 million. Of these 169 new launches, 24 had assets of at least $50 million.


Last month saw $483 million flow into municipal-bond funds, the highest amount for a single month on record. Compared with mutual fund assets, ETFs are underrepresented in the municipal-bond space. ETFs account for about 12% of total mutual fund and ETF assets in U.S. stock funds and about 8% in the case of taxable-bond funds, but they amount to just 2% of assets in municipal-bond funds.


Stock Investors Continue to Favor Emerging Markets
The diversified emerging-markets category was the largest draw within the international equity arena, attracting $1.8 billion in net inflows in November. Favorable regulatory developments have provided Indian stocks with some positive momentum of late. Low volatility is a theme that continues to resonate with investors.


Large Over Small
Large caps have outperformed small caps recently, and, based on our analysis of ETF flows, it appears that investors have taken notice. The Russell 1000 Index has returned 11.7% over the past two years compared with a 7.8% return for the Russell 2000 over the same span.


Dividend-focused funds have been one of the most popular categories among equity investors over the past several years. We count 18 dividend-themed ETFs in the U.S. stock sector. Total assets in the group are about $45 billion, up from just $8 billion three years ago. They have averaged about $800 million in monthly net inflows over the past three years but saw net redemptions of $355 million last month.

Precious-metals funds attracted strong flows last month. As we highlighted previously, gold can serve as a form of disaster insurance.

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Michael Rawson, CFA  Michael Rawson, CFA is an ETF Analyst with Morningstar.

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