If you think that exchange traded funds (ETFs) have been hemorrhaging assets along with mutual funds, you’d be completely wrong. The kind of inflows and trading volume ETFs have received this year might be enough to quiet the most pessimistic of people who say that industry closures mean the death of the ETF as we know it.
True, it’s been a rocky year for ETFs: bond ETFs were trading at a discount to their NAV, there was a temporary restriction placed on short-selling and a collapsing credit market put a question mark over exchange traded notes (ETNs). But by and large, the ETF industry seems to have emerged through the other side relatively unscathed, plagued by none of the problems that have vexed other types of investments, particularly that of transparency.
In fact, they’re more popular than ever. In an appearance on CNBC last week, iShares Global CEO Lee Kranefuss pointed out that this year, the average daily equity trading volume has risen from 28% pre-Lehman Brothers bankruptcy to 40% after the investment bank collapsed. Most days, eight of the top 10 equities traded are ETFs.
And most interestingly, year-to-date, equity mutual funds have seen more than $70 billion in outflows, while ETFs have seen $70 billion flow in. The outflows for equity mutual funds, in fact, are perched at near-record levels. In September alone, investors put $56 billion into ETFs, while $49 billion came out of equity and bond mutual funds (this doesn’t include fund of funds or money market mutual funds).
It’s stunning, considering that we’re in the midst of one of the most volatile markets in decades. But to proponents of ETFs, it’s not that surprising. After all, with all of the market turmoil, volatility and uncertainty, investors of all types are increasingly looking toward products with more transparency.
According to TrimTabs Investment Research, financial and energy ETFs posted record inflows in September, pulling in $9 billion and $4.6 billion, respectively. Information technology and telecommunication services ETFs, on the other hand, redeemed $480 million and $14 million, respectively.
State Street Global Advisors does a monthly report on fund flows, and found that through September, while industry assets fell $2.9 billion for one month, certain key areas are still getting attention. Financial, energy and consumer staples each grew more than 25%.
ETF investors are resilient, smart and don’t get caught up in their emotions. Our survey reveals that most of these investors are spying buying opportunities are that they plan to hold for the long term. Only about 10% of those have succumbed to the market volatility and sold.
Kranefuss shared his own thoughts about why ETFs continue to attract money, even in severely down markets.
“ETFs provide a very convenient mechanism for both individuals and institutions to trade whole segments of the market. It’s been growing pretty consistently for about five years…You get the benefit of knowing what you own.”
The trend has extended to ProShares, according to CEO Michael Sapir, who says that their overall assets continue to grow and the short and leveraged ETF provider is about even in terms of assets on both the long and short side of its ETFs.
“For the first time, that’s the case since we started in June 2006.”
The trend began about seven weeks ago, he says, when assets began to pull out of their short ETFs and go into leveraged positions. “The ETFs that have seen the greatest flows are the ultras.”
Sapir does admit that the ETF has had its share of difficulties in recent months as the market has struggled, but he doesn’t think that it’s all doom and gloom for the industry from here on out.
“People tend to suggest that this sounds the death knell for the ETF industry. The truth lies somewhere between those two extremes. ETFs will continue to thrive over time, but they’re probably not going to take in all the assets that are available for investment,” Sapir says.
As for who’s bringing in the money, Sapir says he’d be surprised if it were individual investors, as most self-directed investors are moving off to the sidelines while they wait for a turnaround. “I’d be surprised if they’re moving into conventional ETFs at this point. They’re kind of scared.”
Whatever the reason and wherever the money is coming from – individual or institutional investors – Sapir isn’t surprised. “We’re not in the business of predicting what parts of the market are going one way or the other. That’s been what our investors use the ETFs for. I’m not surprised by anything.”