U.S.-listed ETF assets have climbed $224 billion this year due to price appreciation and net inflows of $133 billion, according to ConvergEx Group.
There are more than 1,500 exchange traded products listed on domestic exchanges with total assets of $1.6 trillion. Meanwhile, aggregate daily volume in ETF trading is up 10% from last year, to $63 billion daily.
“The success of ETFs in gathering assets continued in the third quarter of 2013, and with just a few days to go inflows total $59 billion,” said Nicholas Colas, chief market strategist at ConvergEx Group, in a note Thursday.
He said tracking ETF flows provides useful information for several reasons.
“First, ETFs have become an important go-to investment class for a variety of investors, from sophisticated hedge funds to mom-and-pop retail accounts. Flows correspond to interest in a particular asset type such as U.S. stocks or gold. Essentially, ETFs are to capital markets what Google Trends is to the Internet. Second, ETF trading can have direct effects on the underlying securities they track. When demand for a given ETF investment outstrips the market’s natural liquidity, authorized brokers step in to ‘Create’ more shares by purchasing the underlying assets,” the strategist wrote.
“Lastly, the transparency of ETF trading and asset composition allows for a very granular look at market trends,” Colas added. “Mutual fund flows, for example, only come out once a week and even then the data is delayed by a few days. ETFs, by their nature, provide more detail than mutual funds and the information is available daily.”
Here are ConvergEx Group’s top 10 takeaways from ETF third-quarter flows:
1. No “Great Rotation” yet. If you thought Q3 was the beginning of a tidal wave of bond money flowing into stocks, the data doesn’t support that theory. The stock/bond split of flows for all of 2013 is 89/9; for the third quarter it is 94/6. Not much of a difference.
2. ETF investors are back to buying Emerging Markets. Funds which track EM are up $4 billion quarter to date, versus a still negative $3.6 billion for the year 2013 as a whole.
3. Gold/Precious Metals/Commodity funds still sloppy. The large outflows from these former market-leading assets occurred in the first half of the year with $22 billion in redemptions. Q3 is smaller – just $1.2 billion in commodity fund outflows. Gold funds are the drivers of these results. Note to the Federal Reserve: deflation is still a real threat, at least in the eyes of the ETF world.
4. Inverse Leverage ETFs show remarkable resilience. For the QTD, flows into these products total $1.7 billion, led by products which short small cap stocks, crude oil, the S&P 500, gold mining stocks, and NASDAQ names.
5. That said, straight-up exposure is still the overwhelming driver of ETF flows. Drilling down one decimal point, unlevered ETFs of all stripes (bonds, stocks, commodities, etc.) have drawn $57.7 billion of the total $58.7 billion in ETF flows this quarter.
6. The hot sectors this quarter were Basic Materials, Technology and Health Care, each with over $2 billion of fresh money.
7. On the not-so-hot side, financials and energy are losing traction with ETF investors after a strong first half. Financials: $1.6 billion QTD, almost $7 billion YTD. Energy: $1.2 billion QTD, $4.3 billion YRD>
8. Stone cold: Industrials, which only garnered $29 million in fresh capital this quarter after $1.5 billion of inflows in the first half. Left for dead: utilities, but that has been the case most of the year. Negative $65 million QTD and negative $129 million for all of 2013.
9. Actively managed funds – mostly fixed income at this point – continue to plow along raising small amounts of capital with $326 million for the quarter. This will – eventually – be the next large growth area of ETFs.
10. The final quarter is going to be bumpy. Not in our helpful table but still useful is the one-week ETF money flows: negative $89 million. It’s not unusual for ETFs to have down weeks for flows, of course. And in the context of the post-FOMC sell-off, such a small number doesn’t really indicate much. Over the last several years total ETF flows have run about $150-200 billion annually. By that measure there is still a remaining $20 – 70 billion left to show up between now and December 31st. How and when it comes will certainly have a say in whether we’ve seen the highs for stocks in 2013, or have one last hurrah.