ETF Asset Flow Roundup: Emerging Bond Gains, U.S. Bond Suffers


The U.S. stock market scaled record highs yet again as both the S&P 500 and Dow Jones hit all-time highs. The record-breaking numbers came from a gradually improving economy, strengthening job market, increased merger & acquisition activities and low interest rates. The move by European Central Bank (:ECB) to cut interest rates and set additional stimulus plans in order to fight low inflation also fueled the rally in the equity markets (read: Negative Interest Rates Put These European ETFs in Focus).

However, trading volume on the major U.S. exchange touched the lowest level last month since the 2008 financial crisis given concerns over uneven economic growth, lackluster first-quarter earnings and lofty valuations. These worries compelled investors to flock to low risk products like ETFs.

Given this, the U.S.-listed ETFs pulled in about $3 billion capital last week, propelling the total asset base to a new record of $1.819 trillion. International equity ETFs led the way in terms of asset gainers with $1.2 billion, closely followed by $1.1 billion in U.S. equity ETFs. In the fixed income world, international ETFs gathered $649 million while U.S. funds saw inflows of only $147 million, as per

Asset Gainers

Emerging market bonds, which turned out of investors’ favor last year, are once again shining as the top asset gainers. Investors poured money into these funds driven by the positive developments in key emerging markets like India, Indonesia, Brazil and Turkey. Further, bonds of the developing nations currently have higher yields than that of U.S. counterparts, as yields from the U.S. bonds are declining despite the Fed curtailing its stimulus.  

That being said, iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB), with an asset base of around $5.1 billion and average daily volume of about 876,000 shares, pulled in more than $594 million in capital last week. This fund provides exposure to U.S. dollar denominated government bonds issued by 30 emerging market countries by tracking the J.P. Morgan EMBI Global Core Index (read: Time to Buy Emerging Market ETFs?).

The product focuses more on mid-term securities at 58% of assets, while long-term securities make up for one-third of the portfolio. Holdings 254 securities in its basket, the fund has average maturity of 11.26 years and effective duration of 7.14 years. Additionally, high yield bonds account for 69% share while investment grade bonds take the remainder. EMB charges 60 bps in annual fees from investors and added 0.36% last week.  

Apart from emerging market bonds, investors are also favoring broad equity U.S. ETFs. Notably, the ultra-popular SPDR S&P 500 (SPY) has gathered $464 million in assets, propelling its total base to $161.75 billion. Another large cap ETF – Vanguard S&P 500 (VOO) – has accumulated nearly $408.5 million, having a total asset base of around $19.3 billion.  

Both the large cap funds gained nearly 1.4% over the past week and have a Zacks ETF Rank of 2 or ‘Buy’ rating with Medium risk outlook (read: 3 Non-Leveraged ETFs Beating SPY).

Long-term U.S. Treasury ETFs like iShares 20+ Year Treasury Bond (TLT) also garnered over $434 million in its asset base thanks to a steep fall in yields. The fund targets long-term securities with average maturity of 27.14 years and effective duration of 16.77 years and tracks the Barclays U.S. 20+ Year Treasury Bond Index. The ETF lost nearly 2% last week and has a Zacks ETF Rank of 3 or ‘Hold’ rating with High risk outlook (read: 3 Long Term Bond ETFs Surging as Rates Stay Low).

Asset Losers

While long and mid-term bonds are performing better, short-term bonds are struggling due to lower yields and interest rates. This is especially true as iShares 1-3 Year Credit Bond ETF (CSJ) saw huge outflow of $770 million last week. This ETF provides exposure to short-dated high quality bonds by tracking the Barclays U.S. 1-3 Year Credit Bond Index. In total, the fund holds large basket of 889 securities with average maturity of 2.03 years and effective duration of 1.96 years.

The product is one of the low cost choices in the bond ETFs space, charging 20 bps in fees per year. It has a Zacks ETF Rank of 2 with Low risk outlook. The ETF lost 0.12% last week.

Two other losers in terms of asset inflow are equity ETFs - iShares Russell 2000 (IWM) and PowerShares QQQ (QQQ). IWM pulled out $752.2 million in capital last week, resulting in roughly $23.66 billion in asset base. On the other hand, QQQ shed $677 million, ending up with an asset base of $43.1 billion (read: May ETF Asset Report: Bond Funds Soar, U.S. Equities Suffer).

This is because small caps and momentum stocks, which enjoyed an incredible run and led the broad rally last year, have been hit over the past couple of months on valuation concerns (see: all Small Cap ETFs here).

IWM provides exposure to the small cap segment of the broad U.S. equity market by tracking the Russell 2000 Index while QQQ targets large cap securities by tracking the Nasdaq-100 Index. The small cap ETF charges 24 bps in annual fees and the large cap ETF charges a lower fee of 20 bps every year. Both the funds added 2.8% and 1.6%, respectively, in the past one-week and have a Zacks ETF Rank of 3.

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