By Christian Magoon
CEO, Magoon Capital
Near the conclusion of each year, it is always interesting to examine the ETFs that have been the most successful gathering new assets.
While funds with a larger asset base at the beginning of the year generally have an advantage over smaller sized funds, the metric is the best gauge of absolute ETF investor interest in a given year. This year's leaders list offers interesting data in terms of ETF usage trends. While many long-term ETF investors will be familiar with the majority of top performers, there are a few surprises. First, let's examine the ETF inflow leaders chart and then move on to make several observations. The year to date chart below was composed using the Index Universe fund flow tool and is as of December 10, 2012.
From a high level, the most interesting observation to me was that only four of the top ten funds were income oriented - even with giving the benefit of the doubt to the Vanguard REIT ETF (VNQ). Despite massive flows into fixed income mutual funds, ETF industry assets are still primarily driven by equity flows. In fact, the five equity funds in the top ten have added about $28 billion in comparison with income-oriented ETFs generating $20 billion. (this includes $4.4 billion into VNQ which technically is an equity ETF) In comparison, equity mutual funds had experienced outflows of about $100 billion while bond mutual funds had tallied about $270 billion of new inflows. This data was as of the beginning of November and based on an analysis of Investment Company Institute (ICI) data. Why are income ETF inflows not crushing equity ETF flows like they are in the mutual fund industry?
First, traditional fixed income ETFs are much newer to the marketplace than equity ETFs. Because of this there aren't as many offerings available to investors. This is changing quickly as evident by BOND, an active income ETF launched in 2012 that made the top ten. Secondly, remember ETF investors aren't exactly the typical investor. Based on shareholder data from the ICI, ETF shareholders are more educated and have a higher net worth than mutual fund shareholders. Perhaps the race to traditional fixed income investments during a time of near record low interest rates isn't as appealing to ETF investors due to their sophistication.
Finally assets in mutual funds are dominated by actively managed funds. As mentioned before, the amount of fixed income ETF offerings isn't significant but even rarer is the actively managed fixed income ETF. This category is much less mature than fixed income ETFs and thus handicaps the ETF industry's growth at a time of record fixed income mutual fund flows.
There are a wealth of other observations besides asset class flows one can glean from the chart above. Clearly 2012 has been a year of money in motion in the emerging market ETF space as VWO and EEM began the year competing solely on price and now have added differentiation in the underlying indexes being tracked. The SPDR Gold Trust (GLD) continues to grow as gold is on track for another positive year. ETF Sponsors Vanguard and iShares are locked in a healthy battle for industry leadership with top ten flows of $18 and $16 billion respectively. Finally investors are obviously continuing to use ETFs as core holdings with broad based equity ETF tracking the S&P 500 index like SPY, IVV and VOO all growing enough to make the top ten in 2012.
ETF inflows leaders in 2012 show that ETF industry is evolving. Traditional equity ETFs are producing less dominate inflows in relation to fixed income, commodities and active ETFs. The ETF industry and vehicle appears to becoming more diversified in its appeal and asset base. For investors this is a good sign as it will spur on increased industry competition and decreased costs of ETF ownership.