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We analyze mutual fund and ETF flows to gather insight regarding investor preference and risk appetite.Inflows into emerging market equities and non-investment grade bond ETF's have significantly deteriorated.The single largest outflows in the month of May has been experienced by GLD, the paper gold ETF. Over the past five months it has lost as much as 35% of today's assets (by outflows alone; negative performance comes on top of this).
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Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 1
ETF Report
Exchange Traded Funds - US listed - May 2013
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 2
Contents
Introduction .................................................................................................................................................. 3
Flows by Asset Class: Dollars ......................................................................................................................... 4
Flows by Asset Class: % of Assets.................................................................................................................. 5
IG Bonds: Flows in % of Assets ...................................................................................................................... 6
HY Bonds: Flows in % of Assets ..................................................................................................................... 7
US Equities: Flows in % of Assets .................................................................................................................. 8
International Equities: Flows in % of Assets ................................................................................................. 9
Precious Metals: Flows in % of Assets ........................................................................................................ 10
Risk Appetite: High ...................................................................................................................................... 11
Mutual Fund Flows: Domestic Equity ......................................................................................................... 12
Correlation: Equity MF Flows and S&P 500 ................................................................................................ 13
Mutual Funds Flows: International Equity .................................................................................................. 14
Mutual Fund Flows: Taxable Bond Funds ................................................................................................... 15
Mutual Fund Flows: Equity Versus Bond .................................................................................................... 16
Conclusions ................................................................................................................................................. 18
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 3
Introduction
Since the 'birth' of the first ETF (Exchange-
Traded Fund) in 1993 their march towards
success has been uninterrupted. As of
February 2013, US listed ETF's contained
over $1.4 trillion in assets under
'management'1.
With more than $9 trillion in managed
assets23, US mutual funds are still
command a much larger pile. However,
outflows from mutual funds investing in
domestic equities have persisted over the
last 6 years.
Investors, discouraged by
underperformance of actively managed
funds, are switching to ETF's with
significantly lower fees than comparable
mutual funds.
It is fair to assume ETF's will continue to
grow rapidly and will impact market
performance due to their sheer size.
To get insights into investors behavior we
look at flows in and out of the 20 largest ETF's, covering over 40%
of all ETF assets.
Looking simply at assets under management is misleading, since
performance can have a significant impact on the value of assets.
We therefore look at pure flow data, ignoring the impact of
performance. For example: the 57% increase in assets for EEM
(Emerging Markets ETF) could be entirely due to performance, or
flows or a mix of both. The increase in assets of ETF's tracked from $520bn to $605bn from July 2012 to
January 2013 consisted of $40bn of inflows and $45bn in performance.
1 Source: IndexUniverse.com
2 Source: Morningstar Direct US Open-end asset flows update, January 2013
3 Excluding $2.6 trillion in US Money Market Mutual Funds
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 4
Flows by Asset Class: Dollars
One way to analyze flows is to aggregate them by asset class in dollar terms. Above you see cumulative
flows over the last 12 months.
Observations:
Real-estate remained at $5bn of inflows.
Precious metal-related ETF's saw outflows of $11bn (7bn outflows)
International equities experienced $9bn (previous month: $9) billion in inflows
Domestic equities saw inflows of $27bn ($21bn)
Flows into high-yield bond ETF's are barely positive. HYG (high-yield ETF) had its third
consecutive month of inflows while JNK (junk) experienced its fourth consecutive month of
outflows.
Investment-grade (IG) bonds reported outflows of $1bn ($3bn inflows)
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 5
Flows by Asset Class: % of Assets
An inflow of $1bn does not matter much for SPY with assets over $100bn. However, it might matter for
the $5bn Russel MidCap ETF (IWR). It therefore makes sense to look at flows relative to assets.
Observations:
Real estate shows the strongest relative inflows of 47% (previous report: 48%) of their assets.
Precious-metal related ETF's saw outflows of 10% (-6%)
International equity ETF's enjoyed inflows of 26% (26%)
US equity ETF's grew by 27% (23%)
Inflows into high-yield bond ETF's increased to 12% of AuM (5%)
Investment grade ETF's saw flows of- 3% (+3%) of their assets
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 6
IG Bonds: Flows in % of Assets
Investor preferences change, and so do flows. Looking at rolling changes in flows can reveal interesting
trends.
Observations:
TLT (20+ year Treasury bonds) had the first outflows after three consecutive months of inflows
TIP (Treasury inflation-protected bonds) had outflows in 10 out of the last 12 months
Enthusiasm for BND (total bond market) continued to cool off
LQD (investment-grade corporate bonds) had six months of consecutive outflows
Municipal bond ETF (MUB) had 21 consecutive months of inflows
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 7
HY Bonds: Flows in % of Assets
Observations:
The massive inflows into speculative bond ETF's seen in 2012 have subsided
Junk-bond ETF (JNK) had four consecutive months of outflows of $2bn or 16% of assets
High-yield ETF (HYG) saw three months of inflows after five consecutive months of outflows
Waning demand from high-yield ETF's might make it more difficult for lowly rated borrowers to
access capital markets or could lead to stricter covenants
Leveraged buy-outs (LBO's) depend on a receptive high-yield market for financing; if inflows
stop, additional supply would likely be absorbed only at higher yields
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 8
US Equities: Flows in % of Assets
Observations:
Nasdaq (QQQ) and Dow Jones (DIA) related ETF's have lagged overall inflows into domestic
equity ETF's. This might have to do with the end of the bubble in the stock price of Apple, which
is heavily weighted in Nasdaq benchmark indices. For the Dow Jones we can only speculate
investors might finally realize the nonsensical nature of a price-weighted index.
Inflows into IVV remained strong as indices made new all-time highs in May
Inflows into IWR (Russell MidCap) cannot keep pace with the large cap ETF's
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 9
International Equities: Flows in % of Assets
Observations:
In good times, investors feel confident and venture abroad in search of higher returns
Broad international equity ETF (EFA) saw inflows after two consecutive month of outflows
Emerging Markets ETF (EEM) continued to experience large outflows ($8bn, or 16% of assets,
over past four months)
Emerging Markets ETF (VWO) also had large outflows ($3bn, or 6% of assets, over the past three
months)
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 10
Precious Metals: Flows in % of Assets
Observations:
Interest in precious-metal related investments is, with the exception of silver, close to a freezing
point
Flows into the Senior Gold Miners ETF (GDX) were concentrated over two months (August and
September 2011), coinciding with the all-time high in spot gold prices ($1,923/oz)
Despite negative performance, GDX has not seen any outflows for the fourth consecutive month
GLD experienced five consecutive month of outflows with a combined $16bn, or 35% of today's
assets, leaving the ETF
Silver ETF (SLV) had the worst monthly outflow (-$330m) since June 2011
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 11
Risk Appetite: High
Here, we calculate the ratio between two sub-groups of the same asset class:
speculative bond (HYG, JNK) to non-speculative bond ETF's (TLT,TIP, BND, LQD, MUB)
international equity (VWO, EFA, EEM) to domestic equity ETF's (SPY, QQQ, IVV, VTI, DIA, IWR)
We used relative assets under management instead of relative flows as the time series are quite volatile.
Observations:
Risk appetite is cooling off based on investor's preference for domestic over international
equities.
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 12
Mutual Fund Flows: Domestic Equity
Observations:
Long-term domestic equity mutual fund outflows continued for the second consecutive months
Outflows have occurred on 23 out of the past 25 months.
Conclusions:
The retail investor has realized two things:
Paying fees for active management does not pay (majority underperforms over longer periods)
Global stock markets have been propped up by central bank actions and are overvalued
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 13
Correlation: Equity MF Flows and S&P 500
Observations:
Despite few months of equity MF inflows (dots above the horizontal zero line) a certain positive
correlation exists with the performance of the S&P 500 Index
However, excluding the two extremes (October 2008, April 2009), the coefficient of determination
declines considerably (r2 = 0.28 instead of 0.45)
Using 3-months data does not lead to significant improvements in the coefficient of determination
(r2 = 0.51; 0.26 excluding extremes)
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 14
Mutual Funds Flows: International Equity
Observations:
Inflows into long-term international equity mutual funds continued for the fifth consecutive
month
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 15
Mutual Fund Flows: Taxable Bond Funds
Observations:
Taxable bond mutual funds have shown inflows in 51 out of the past 53 months
Despite record-low yields and negative real returns, investors seem to prefer the "sparrow in
the hand"
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 16
Mutual Fund Flows: Equity Versus Bond
Observations:
Outflows from domestic equity mutual funds have slowed down
Investors still prefer taxable bond funds
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 17
Mutual Fund Flows: Municipal Bonds
Observations:
Municipal bond mutual funds recovered from the "Whitney" crash (on December 19, 2010,
Meredith Whitney predicted hundreds of billions in losses from defaults on TV)
However, rating agencies are waking up to the growing hole of underfunded pension plans
A rise in income tax rates would make muni bonds (tax-exempt) more attractive
An abolishment of tax-preferred status of muni bonds would lead to significant losses for their
owners
Private investors owning muni bonds directly have usually not the capability to adequately judge
the risks associated with individual bonds
Lighthouse Investment Management
ETF Report - US listed - May 2013 Page 18
Conclusions
Risk appetite has begun to cool off
International equity ETF's are seeing significantly less inflows than domestic equity ETF's in
absolute dollar terms (but similar inflows relative to their asset base)
Emerging market equity ETF's experienced significant outflows
Inflows into high-yield bond ETF's have cooled off considerably, with the leading junk-bonds ETF
(JNK) losing 16% of its assets over the past four months
Interest in precious metal-related ETF's remains low; GLD saw the largest outflow of all ETF's we
cover for the second month in a row and has lost 35% of today's assets over the past five
months
A prudent or contrarian investor would use the opportunity to shift positions into more
defensive ETF's
Any questions or feedback welcome.
Disclaimer: It should be self-evident this is for informational and educational purposes only and shall not be
taken as investment advice. Nothing posted here shall constitute a solicitation, recommendation or
endorsement to buy or sell any security or other financial instrument. You shouldn't be surprised that
accounts managed by Lighthouse Investment Management or the author may have financial interests in any
instruments mentioned in these posts. We may buy or sell at any time, might not disclose those actions and
we might not necessarily disclose updated information should we discover a fault with our analysis. The
author has no obligation to update any information posted here. We reserve the right to make investment
decisions inconsistent with the views expressed here. We can't make any representations or warranties as to
the accuracy, completeness or timeliness of the information posted. All liability for errors, omissions,
misinterpretation or misuse of any information posted is excluded.
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