Investors fretting over a weaker U.S. dollar and the outlook for inflation have been stuffing cash into exchange-traded funds following commodities, foreign stocks and inflation-protected bonds, industry data show.
"Aside from hunting for low-duration bond ETFs in an effort to avoid excessive interest rate risk, it appears that investors are also bracing their portfolios for a potential long-term bout of inflation," said John Gabriel, ETF analyst at Morningstar Inc.
He said industrywide ETF assets topped $700 billion last month, with year-to-date inflows of $56.3 billion. "ETF industry flows have been quite strong so far in 2009, with positive flows in every month except February," Gabriel said.
So where is the money going? Into bonds, commodities and international stocks, particularly the emerging markets subcategory. Leveraged and inverse ETFs, the high-powered funds that have attracted regulatory scrutiny this year, saw positive inflows in September after investors pulled money the previous two months.
Bonding With Bonds
For the major asset classes, taxable-bond ETFs hauled in the most new money in September, according to Morningstar.
The preference for bond ETFs mirrors the buying trends in mutual funds. Many retail investors sat out the rally that started in March. Still wary of stocks after their plunge during the credit crunch, individual investors have piled into bond funds.
"The shift into fixed-income ETFs has been an ongoing theme thus far in 2009; year-to-date the category has brought in about $26.7 billion of new assets, which makes it the most popular ETF category so far in 2009," Gabriel pointed out. "For some perspective, consider that taxable-bond ETFs attracted approximately $17 billion in all of 2008."
The earliest ETFs tracked stocks, but the bond side of the business is growing. At the end of September, there were 768 U.S.-listed ETFs. Of these, 68 were fixed-income funds, with about $91 billion in total assets, according to research from State Street Global Advisors.
"From their start with a handful of options in the 1990s, ETFs have grown up around a clear value proposition, low-fee offerings that allow for diversification and/or targeted investment themes," said Nicholas Colas, ConvergEx chief market strategist.
"Their collective success is printed on the tape every day, with products like the SPDR S&P 500 ETF (SPY), PowerShares QQQ Trust (QQQQ) and Financial Select Sector SPDR Fund (XLF) at the top of the volume tables for exchanges, alternative trading venues and dark pools," he said.
In terms of size, one bond fund that has been roaring up the charts is designed to protect investors from inflation: the iShares Barclays TIPS Bond Fund (TIP). The ETF, which is indexed to a basket of Treasury Inflation-Protected Securities, has grown to nearly $17 billion in assets.
"After enjoying more than $6.5 billion in net inflows year-to-date, iShares Barclays TIPS Bond has doubled in size and currently stands at well over $16 billion in assets after closing out 2008 at roughly $8 billion," said Gabriel, the ETF analyst.
He said another bond ETF gobbling new assets is the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), which has about $13 billion.
"This year we've also seen investors rush into junk bonds with hopes of cultivating equitylike returns and generous yields, thanks to the historic widening of yield spreads in recent months," the analyst observed.
Two of the largest ETFs in this category, which has benefited from a reappearance of investor appetite for risk, are SPDR Barclays Capital High Yield Bond (JNK) and iShares iBoxx $ High Yield Corporate Bond (HYG).
Digging Gold And Other Commodities
Inflation fears also have pushed investors into ETFs tracking gold and other commodities.
Investors can get exposure to gold prices with ETFs such as SPDR Gold Shares (GLD), which trades on the NYSE Arca exchange and charges annual fees of 0.4%. This huge ETF holds more than $37 billion in assets and has been a popular vehicle to trade the precious metal, with gold futures over $1,000.
Gabriel said strong interest in commodities markets is being driven by "tactical strategies looking to join in on the popular 'reflation' trade and more folks allocating a portion of their portfolios to commodities for the longer-term diversification benefits that this non-correlated asset class can provide."
However, some commodities ETFs that invest in futures contracts have run into trouble lately as a result of position limits imposed by the Commodity Futures Trading Commission.
Some of the funds are broad-based and hold several commodities, such as PowerShares DB Commodity Index Tracking (DBC). The ETF, with assets of nearly $4 billion, recently expanded the number of commodities it tracks as a result of the CFTC's stepped-up examination of certain ETFs.
Some ETFs like United States Oil Fund LP (USO) track individual commodities. Additionally, there are commodity-themed ETFs that invest in stocks, rather than futures.
Eyeing Emerging Markets
The big rally in emerging markets has attracted investors to this volatile sector. Two of the top-selling funds this year are the iShares MSCI Emerging Markets Index Fund (EEM) and the Vanguard Emerging Markets ETF (VWO). The latter fund recently posted a year-to-date gain of 73.5%.
ETFs targeting individual developing countries such as the iShares MSCI Brazil Index Fund (EWZ) have also garnered interest.
"With hopes of increased U.S. and European demand for commodity and other emerging markets exports bolstered by a good start to the third-quarter earnings season and the latest Chinese trade numbers, investors poured money into emerging markets equity funds during the second week of October," said investment researcher EPFR Global in its latest weekly update.
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