January ETF Data: Industry Springs A Leak

by on February 3, 2010 | ETFs Mentioned:

Usually the monthly release of ETF trading data from the National Stock Exchange provides a good opportunity for those covering the industry to feed the hype machine just a little more. Big asset growth and cash inflows have become as certain as death and taxes, with each month adding momentum to the runaway freight train that is the ETF industry.

So it’s likely that many are doing a double take while examining the January numbers. The train may not have derailed last month, but it lost quite a bit of steam. Total ETF assets declined from $790.9 billion at the end of December to $744.7 billion in January, a whopping month-over-month drop of 5.8%. Part of the decline can be attributed to poor performance from equity markets in the second half of the month, but total ETF cash outflows of $17.2 billion for the month certainly raise a few red flags.

But here’s the good news: these figures are quite misleading. More than $16 billion of outflows are attributable to a single fund, the SPDR S&P 500 (SPY). SPY’s massive outflows were first noted by Matt Hougan two weeks ago, when monthly outflows had already topped $13 billion. “Looking back over the years, you can see that this is not an isolated event,” writes Hougan. “Each December like clockwork, investors pile into SPY. And each January, they pile right back out. In, out, in, out.” An explanation for SPY’s sudden sieve-like quality is difficult to put a finger on. The iShares S&P 500 Index Fund (IVV), SPY’s primary competitor, saw outflows of about $200 million on the month.

Despite the turmoil at the top, many of the smaller funds grew in January, adding depth to the industry. Outflows to the five largest ETFs (SPY, GLD, EEM, EFA, and IVV) totaled $18.2 billion last month, meaning that beyond the industry’s largest players, growth continued to start 2010. On the whole, January was a very good month for the ETF industry, as 423 ETFs/ETNs saw cash inflows compared to only 179 with outflows.

The Good News

A handful of issuers saw big surges in assets in January. Vanguard saw $3.7 billion in cash inflows, further closing the gaps between iShares and State Street at the top of the industry. But among the top ten issuers by total assets, only Vanguard, Van Eck, and Rydex saw net inflows during January.

Still, the month was a good one for several of the smaller players in the industry. ETF Securities saw assets more than double, boosted by a warm reception for the first physically-backed platinum and palladium ETFs available to U.S. investors, and announced today that the issuer had topped the $1 billion in assets mark for the first time. PIMCO also continued its surge, taking in $80 million, equivalent to about 17% of the prior month’s assets. Of the seven issuers with assets between $100 million and $1 billion in December, five saw upticks in total assets in January, including RevenueShares and Greenhaven.

Charles Schwab took in $160 million, or 46% of December assets, as two new international equity funds had a good first month. Inflows into Emerging Global Advisors’ four emerging markets ETFs were nearly 40% of year-end assets, a sign that investors continue to embrace sector-specific emerging market exposure.

ETF By ETF

One “race” that we’ve been closely monitoring over the last year is that between emerging markets ETFs from iShares and Vanguard. EEM and VWO both track the same benchmark, the MSCI Emerging Markets Index. But despite significantly higher expenses (0.72% vs. 0.27%), EEM dwarfs VWO is terms of total assets. That gap closed quite a bit in January, as EEM saw $1.2 billion leave the fund and VWO raked in about $980 million in cash. As we noted in this month’s ETF Edge, the expense ratio may prove to be iShares’ Achilles heel, as a clear trend towards lower-cost ETFs is emerging (if you’re not subscriber to ETF Edge yet, sign up for a free trial or read more here).

Funds seeing big outflows included the PowerShares DB U.S. Dollar Index Bullish (UUP), which shrunk from $3.2 billion to $2.2 billion, and the iShares FTSE/Xinhua China 25 Index Fund (FXI), which saw total assets decline from $10.2 billion to $8.0 billion. The United States Natural Gas Fund, which has relied on big cash inflows over the last year to stay afloat, reported net zero cash movements on the month, although total assets declined from $4.6 billion to $4.2 billion.

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Disclosure: No positions at time of writing.