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ETF Underdogs Rise Again


Despite a strong showing in February for U.S. stocks, year-to-date inflows for equity-based exchange traded funds are unimpressive to say the least.

Last year was a memorable one for inflows to exchange traded products . Inflows reached a record $247.3 billion, marking the second consecutive year the number was above $200 billion. To this point, inflows to equity ETFs do not look poised to recapture last year’s magic. Even when backing out the $17.4 billion lost by the SPDR S&P 500 (SPY) , inflows to equity ETFs this year are a scant $1.1 billion, according to ConvergEx Group data.

“Why the change in investor psychology in just two months? The simple answer is risk and volatility. Investors seem happy to take their outsized gains from 2013 and park them in relatively safer fixed income instruments. Other 2014YTD winners were also underdogs just 60 days ago, and precious metals and utilities funds are also now drawing fresh money again. How soon before stocks become the underdogs? Events in Ukraine and how stocks react to them – could answer that question soon enough,” says Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York.

Among the underdogs that have been anything but this year are fixed income ETFs. “Of the $14.2 billion in total ETF inflows (and $18.3 ex-SPY) for February, bond ETFs have garnered $17.4 billion of those flows. Which is to say: essentially all of them,” notes Colas. [Believe It: ETF Outflows]

Prodigious gathers of assets among bond ETFs this year include the Vanguard Total Bond Market ETF (BND) , iShares Core Total U.S. Bond Market ETF (AGG) , Vanguard Short-Term Bond ETF (BSV) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) as well as an array of short-duration and high-yield fare.

“With a weekly combined average inflow of $240 million for high-grade and high-yield funds, total inflows for 2014 are now in excess of $1.4 billion, driven by a 9.8% year-on-year increase in money going into high-yield ETFs, with 3.3% finding its way into investment grade ETFs,” Risk.com reports, citing Bank of America Merrill Lynch data. [Bond ETFs: The New Black]

Colas points out other underdog asset classes have appealed to investors this year. For example, major gold-backed ETFs saw their first month of inflows in over a year in February while the Utilities Select Sector SPDR (XLU) has brought in more than $560 million this year.[Turn the Lights on to Utilities ETFs]

“ While it is tempting to say that these flows are merely money chasing performance, it is equally true that capital is fleeing volatility. In less than three months, global equities have first had to address negative economic news from emerging markets and now geopolitical conflict as well. The latter, in the form of the struggles over the Crimea between the Ukraine and Russia, is certainly not at an end. It may not even be at the end of whatever beginning it may have, to paraphrase Churchill,” said Colas.

Vanguard Total Bond Market ETF


Tom Lydon’s clients own shares of SPY and LQD.