Exchange traded funds had a great year in 2011, raking in $108 billion in new cash to finish the year with $1.06 trillion in total assets under management, up 5% from last year. Net cash inflows in the fourth quarter alone accounted for 36% of the $108 billion of new capital. With the introduction of 302 ETFs last year, there are now a total of 1,369 funds in the market.
The top performers of the year were fixed income ETFs, which saw net cash inflows of $36.4 billion. The iShares iBoxx Investment Grade Corporate Bond (NYSEArca: LQD) and Vanguard Total Bond Market (NYSEArca: BND) were among the top performing fixed income ETFs in 2011 with net cash inflows of $3.1 and $5.1 billion, respectively.
Although fixed income ETFs had a great year, funds which invest in U.S. stocks still account for about 43% of total AUM, with the SPDR S&P 500 (NYSEArca: SPY) comprising the largest market cap of all ETFs at a value of almost $96 billion. In 2011, the behemoth U.S. equity ETF piled in $6.3 billion of cash.
Commodities ETFs, which account for 10% of total AUM, slumped in the fourth quarter losing $1.2 billion in cash to finish the year down $242 million. SPDR Gold Shares (NYSEArca: GLD), the largest commodity ETF, had net cash outflows of $2.2 billion in December alone. Leveraged ETFs also saw large cash outflows in the fourth quarter, losing $2 billion, but ended the year up about $8 billion in total AUM.
Mutual funds investing in U.S. stocks had cash outflows of around $132 billion in 2011, while U.S. stock ETFs had cash inflows of $33 billion. While the outflow of cash from mutual funds investing in U.S. stocks was much higher than the inflows, pension funds and other institutional investors moving money into stocks was a large reason why stocks ended the year relatively unchanged.
Due to the lack of any significant yield on fixed income, these investors are being pushed to put their money into stocks in order to achieve higher yields. Thus, what happens to interest rates in 2012 will have a large impact on U.S. stocks.
With the Federal Reserve stating that it plans to keep interest rates unchanged until at least the middle of 2013, rates may very well remain at their current near zero levels. Additionally, in a report from Bloomberg Businessweek, Mark Zandi, chief economist at Moody’s Analytics, said he felt that interest rates would remain unchanged past the middle of 2013, stating, “Most people had expected the funds rate would start rising in the second half of 2013… but Fed officials seem to be more concerned about the economy’s prospects than investors currently think.”