ETF Flows Firming in Second Quarter

ETF Trends

After a sluggish start to the year, inflows to exchange traded products are showing signs of life in the second quarter with the top-10 asset gainers including bond, emerging markets and sector funds.

“After a very choppy first quarter of 2014, U.S. listed exchange traded funds have found their footing through the first half of Q2.  Overall inflows into ETFs total $21.2 billion through May 16 th ; the whole first quarter was just $15 billion,” said Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York.

With the SPDR S&P 500 ETF (SPY) struggling to keep cash in the first quarter, inflows to equity ETFs in the first three months of the year were nearly non-existent. That trend has reversed this quarter with equity-based ETFs gaining $12.5 billion, or 59%, of this quarter’s inflows, according to ConvergEx.

The pace picked up in April when investors poured more than $15 billion into ETFs, despite cash departing SPY , the PowerShares QQQ (QQQ) a nd other marquee products. [April: A Good Month for ETF Inflows]

“ Where’s the balance of the capital moving in 2014?  Yep – fixed income, a.k.a. the most unloved asset class of late 2013.  Total inflows for the quarter to date are $6.9 billion or 33% of fresh ETF money for Q2 2014.  As for “Hot” industry sectors, in Q2 it is one-stop-shop: Energy, with $3.4 billion in inflows versus Financials (negative $1.1 billion) and Consumer Cyclicals (negative $1.4 billion).  In short, ETF money flows to date do a great job of describing an almost Augustinian investor sentiment: give me some serious equity exposure, but not just yet,” said Colas.

Global ETFs have been among the most prodigious asset gatherers since the start of April. In fact, no ETF has raked in more cash than the almost $4.7 billion hauled in by the iShares MSCI Emerging Markets ETF (EEM) , the second-largest emerging markets ETF. [Flows Show Uptick in Risk Appetite]

The Vanguard FTSE Developed Markets ETF (VEA) and the Vanguard FTSE Europe ETF (VGK) have seen combined second-quarter inflows of over $2 billion.

“Fixed income ETFs are still a draw, even if they aren’t playing to sell-out houses as they were in Q1 2014.  For the second quarter thus far, their inflows total $6.9 billion.  Double that for a theoretical Q2 run rate of $14 billion and it is a small downtick from Q1’s $18 billion. Still, for an asset class that was left for dead by the side of the road in late 2013, the Good Samaritan of slow economic growth and deflationary worries has clearly put the bond market back in favor with many investors,” notes Colas.

With $2.2 billion in second-quarter inflows, the iShares 7-10 Year Treasury Bond ETF (IEF) is the top asset gatherer among bond ETF, but investors’ affinity for bond funds has not been limited to Treasury plays. [Inverse Treasury ETFs: A Bad Bet]

Capital is returning to emerging markets and municipal bond ETFs. For example, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) have combined second-quarter inflows of almost $230 million while the Market Vectors High Yield Municipal Index ETF (HYD) has pulled in $146 million.

iShares 7-10 Year Treasury Bond ETF

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Tom Lydon’s clients own shares of EEM, EMB, SPY, QQQ andHYD.

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