Investment Themes From The ETF Space

Flows into the exchange products continue to accelerate. In the first four months of this year, Blackrock estimates some $80 bln have flowed into ETF products globally compared with $66 bln for the same year ago period. The US-listed ETFs took in more than 80% of the inflows.

The ETF business has become somewhat less concentrated. The top 50 ETFs accounted for 62% of the assets under management on May 1 compared with 69% at the end of last year, according to Blackrock figures. Two of the largest ETFs, SPDR Gold Shares (GLD), a popular gold ETF, and the SPDR S&P 500 fund (SPY), experienced outflows.

The ETF that has seen the greatest inflow has been WisdomTree Japan Hedged Equity (DXJ), pulling in an estimated $5.5 bln. Yet it was Vanguard's FTSE Emerging Market ETF (VWO) that has surpassed GLD to move in to second place among US-listed ETFs. It saw net outflows of $1.55 bln in April, but with $57.7 bln of total assets it eclipsed GLD's $50.9 bln.

Of the top 5 US-listed ETFs (by assets under management), three are devoted to international equities. The fifth largest ETF is the ishares MSCI EAFE, also issued by Blackrock, with about $42.3 bln of assets. Two of the top five are devoted to emerging markets. In addition to Vanguard's offering VWO, there is ishares MSCI Emerging Markets (EEM), which Blackrock is the issuer. Between the two of these, there is $102.6 bln invested.

Emerging markets have under-performed developed equity markets. This is partly a function of strong gains in the Nikkei (+31% year-to-date) and US S&P 500 13.2% rise. It is also a function of the fact that the Shanghai Composite is off 1.7%, the Bovespa is off 9% and Mexico is off 2.5%. Russia's MICEX is essentially flat this year, while South Africa's FTSE/JSE All Share Index is up about 3.4%.

That said, helped by the post-election rally in Malaysia, the emerging market stocks, whether measured by VWO or EEM are at seven week highs as of yesterday. VWO finished last week above the 61.8% retracement of the year's decline, leaving it in a constructive technical condition to move continue to trend high after building a base last month. EEM moved above a similar retracement objective before the weekend, but failed to close above. Still, the technical tone is constructive.

Blackrock's April ETF fund flows show that investors put $9.6 bln into global stock funds, which is the least since last October. ETFs that focus on dividend paying stocks accounted for $3.4 bln of these inflows, the most since at least 2010. At $9.5 bln, inflows into global bond funds were the largest since last May.

In the fixed income space, nine of the top 10 bond ETFs in terms of new inflows are accounted for by floating rate or short-duration bond funds this year. Emerging market bond funds are still reportedly seeing inflows, but at a considerably slower pace.