Where The ETF Money Is Flowing (The Answer Might Surprise You)

by on December 29, 2011 | Updated November 20, 2012 | ETFs Mentioned:

As the calendars prepare to flip forward, it appears as if 2011 will go down as a record-breaking year for the ETF industry on the product development front. More than 300 new ETPs began trading this year, shattering the previous record set in 2010. But despite the record size of the ETF lineup, it appears as if growth has slowed quite a bit; cash inflows into ETFs have dropped off in 2011 compared to previous years according to data from the National Stock Exchange. Through the first 11 months of the year, total inflows into exchange-traded products stood at about $101.4 billion, meaning that massive December inflows would be needed to match the hauls for 2010 ($118.7 billion) and 2009 ($119.4). Barring a big surge in the final month of the year, 2011 could be the worst year for the ETF industry since 2006 [For more actionable ETF investment ideas, sign up for the free ETFdb newsletter].

Of course, the magnitude of the inflows are still astounding, and the ETF industry is still on the positive end of the growth spectrum. While funds continue to generally flow from mutual funds to ETFs, the rising tide has not lifted all corners of the ETF market equally. Some asset classes have been cash magnets on the year, drawing in funds from anxious investors. Others have seen money go out the door–generally riskier asset classes that have fallen out of favor [see Low Volatility ETFs Attracting Big Inflows].

Analyzing where the ETF money is going can be a useful exercise since it should provide some insight into investor mentality; growth in asset classes such as stocks generally signals strong appetite for risk, while growth in bonds may signal rising anxiety. Below, we profile some noteworthy trends gleaned from an analysis of ETF inflows and outflows through the first 11 months of the year:

Biggest Winners (Categories)

Stocks and Bonds were the big winners in 2011, taking in the largest hauls of new cash. But the ETFdb Categories that raked in the largest totals included a blend of both risky assets and relative safe havens, highlighting the varying outlooks among investors:

5. Commodity Producers Equities: $7,446 Million

This category may come as a bit of a surprise. Interest in commodity exposure remained high in 2011, but more and more investors are apparently utilizing stocks of commodity producers to tap into this asset class. This ETFdb Category, which includes both broad-based funds such as HAP and more targeted ETFs covering everything from gold miners to timber companies to agribusiness stocks, raked in close to $7.5 billion in inflows through November.

Best In ETFdb Category: Market Vectors Agribusiness ETF (MOO, $3,814 Million)

4. Foreign Large Cap Equities: $8,490 Million

Though many international stock markets struggled in 2011, the poor performance didn’t stop investors from pouring in their cash. This ETFdb Category, which generally covers developed markets outside the U.S., took in more than $8 billion through November [see Actionable ETF Trading Ideas].

Best In ETFdb Category: iShares MSCI EAFE Index Fund (EFA, $4,419 million)

3. Corporate Bonds: $9,329 Million

Highlighting the surge in interest in fixed income in 2011, the Corporate Bonds ETFdb Category represented the third largest aggregate inflows last year.

Best In ETFdb Category: iShares iBoxx Investment Grade Corporate Bond Fund (LQD, $2,891 million)

2. Total Bond Market: $9,436 Million

Investors continued to embrace ETFs as a vehicle for achieving exposure to fixed income securities in 2011, as this ETFdb Category took in more than $9 billion through the first 11 months of the year.

Best In ETFdb Category: Vanguard Barclays Total Bond ETF (BND, $4,421 million)

1. Large Cap Value Equities: $15,267 Million

Investors sought out dividend-focused ETFs in 2011, a noteworthy trend that translated into big inflows for ETFs targeting value companies [see Free Report: How To Pick The Right ETF Every Time].

Best In ETFdb Category: Vanguard Dividend Appreciation ETF (VIG, $3,723 million)

Biggest Winners (Individual ETFs)

A small handful of ETFs accounted for the lion’s share of new cash inflows in 2011, a development that probably isn’t too surprising given the top-heavy nature of the industry. Through November 30, the top five ETFs in terms of 2011 inflows are:

5. Vanguard Dividend Appreciation ETF (VIG, $3,723 Million)

This ETF is linked to the Dividend Achievers Select Index, a benchmark that includes U.S. stocks that have a history of increasing dividends for at least ten consecutive years. As such, VIG consists of many well-known blue chip stocks; the largest individual allocations include McDonald’s, IBM, and Coca-Cola. It should be noted that VIG’s methodology focuses on dividend consistency as opposed to dividend yield, with the result being that VIG maintains a distribution yield only slightly above the S&P 500 [see A Tale Of Two Dividend ETFs].

4. Market Vectors Agribusiness ETF (MOO, $3,814 Million)

With concern over future food shortages intensifying, many investors have identified agribusiness stocks as a potentially lucrative investment destination. And it appears that more and more of them are using ETFs to gain access to this investment strategy [see The Five Biggest ETF Inflows For 2011]. With emerging markets populations continuing to grow rapidly, demand for livestock and agricultural commodities is projected to climb steadily for the next several decades. This demographic trend should translate into strong demand for products and services that can improve crop yields and help to feed an ever-expanding global population.

3. iShares MSCI EAFE Index Fund (EFA, $4,419 Million)

It is perhaps a bit surprising that EFA has seen such strong inflows in 2011, considering that European markets have been battered by a wave of risk aversion (Western Europe accounts for about 65% of this fund). But as investors have sought to increase the allocation to international stocks in their portfolios, EFA has emerged as a popular tool to achieve broad exposure to developed markets outside the U.S.

Interestingly enough, VEA, which is linked to the exact same index as EFA but charges a lower expense ratio, took in about $2 billion during the first 11 months of the year.

2. Vanguard Barclays Total Bond ETF (BND, $4,421 Million)

This ETF offers broad exposure to investment grade U.S. bonds, and apparently had broad appeal with investors in 2011. Bond ETFs have gained widespread acceptance more recently than their equity counterparts, and this segment of the market is still experiencing very rapid growth. BND, which represents one of the cheapest options for gaining broad-based exposure to high quality bonds, has grown to become the largest bond ETF in the Total Bond Market ETFdb Category, recently surpassing AGG [see Better-Than-AGG Total Bond Market ETFdb Portfolio].

In total, the four ETFs linked to the Barclays Capital U.S. Aggregate Bond Index (BND, AGG, LAG, and SCHZ) took in almost $7 billion through November 2011.

1. Vanguard MSCI Emerging Markets ETF (VWO, $7,703 Million)

So far, 2011 has been a brutal year for emerging markets; this asset class has struggled and given back most of the impressive gains racked up last year. So it is perhaps a bit unexpected that an emerging markets fund has led the ETF universe in cash inflows [see Emerging Market ETFs: Five Factors To Consider]. VWO’s success is perhaps attributable to the struggles of another product linked to the exact same index; through November, the iShares MSCI Emerging Markets Index Fund (EEM) had experienced net outflows of almost $7.3 billion (VWO boasts a big cost advantage over EEM, which may explain its growing popularity with investors).

Excluding VWO, the Emerging Markets Equities ETFdb Category experienced close to $8 billion in net outflows through the first 11 months of the year.

Disclosure: No positions at time of writing.