The $1.5 trillion U.S. ETF business continues to grow at a rapid clip with 2013 inflows on track to break last year’s record.
“ETF flows continue at almost the same torrid pace as the first quarter and seem well on their way to adding $200 billion in new investor funds in 2013,” says Nicholas Colas, chief market strategist at ConvergEx Group.
Last year, U.S. ETF inflows reached a record $191 billion, surpassing the $169 billion flow in 2008. [Landmark Year for ETF Industry]
So far this year, the industry has experienced net inflows of $83 billion.
“Flows into equity products are 60% of total this quarter to date, lower than the 80% of Q1 2013,” Colas wrote in a note Friday. “Japan is the white-hot ticket among country-specific investing, with almost 25% of all ETF flows this quarter going into just two such products. On the ‘Not-so-hot’ side, inflation protection is basically stone cold with both TIP and precious metals ETFs losing significant assets this quarter to date.”
Indeed, WisdomTree Japan Hedged Equity (NYSEArca: DXJ) and iShares MSCI Japan (NYSEArca: EWJ) are the best-selling ETFs in 2013. [Yen-Hedged Japan ETFs Soar as Nikkei Tops 15,000]
Regarding the inflation trade, iShares TIPS Bond ETF (NYSEArca: TIP) is in a tailspin and has seen heavy redemptions. [TIPS ETF Down 13th Straight Day]
Investors have also fled gold ETFs amid a sharp pullback in the metal’s price. [Gold ETFs Lose Their Allure]
Conversely, low-volatility ETFs such as PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) continue to be popular with risk-averse investors. [Have Low-Volatility ETFs Overstayed Their Welcome?]
“After several conversations with sponsors and investors over the past few months, it seems clear that this is going to be one of the most important investment trends for the next few years,” Colas said.
Next page: Dividend and VIX ETFs
Dividend ETFs also remain hot with inflows of more than $2 billion quarter to date. Some of the largest ETFs in the category include iShares Dow Jones Select Dividend (NYSEArca: DVY), Vanguard Dividend Appreciation (NYSEArca: VIG) and SPDR S&P Dividend (NYSEArca: SDY). [Dividend ETFs for 2013]
Additionally, Colas observed volatility-linked ETFs tracking VIX futures have seen inflows from investors seeking a hedge, despite their poor performance. The iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) and other products in the category have experienced inflows of more than $300 million quarter to date.
Overall, there are currently more than 1,400 exchange traded funds and notes listed in the U.S.
“Dissecting the money flows into/out of this investment ecosystem gives an increasingly complete picture of market psychology and attention,” Colas wrote.
“The bottom line is that ETFs are increasingly an important go-to investment choice for everyone from retail mom-and-pops investors to the most sophisticated hedge funds on the planet,” the strategist said. “And how often can you say that about, well, anything in the world of high finance?”