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S'P’s Rosenbluth: US Equity Flows Strong

Through the record outflows from ETFs , an easy-to-forget bright spot shined through-namely very strong inflows into U.S. equity strategies, according to Todd Rosenbluth, an ETF analyst with S&P Capital IQ.

Rosenbluth told IndexUniverse.com Managing Editor Olly Ludwig that the overall outflows came as investors began reconsidering holdings of fixed-income and emerging market ETFs after the Federal Reserve began to hint at a world free of quantitative easing.

All the Fed-related market volatility will work itself out in the coming months, said Rosenbluth, who sees more than enough innovation and dynamism in the world of ETFs to make him believe the quickening asset-gathering of recent years will quickly resume.

IndexUniverse.com:What did you make of the record outflows in June?

Rosenbluth: It was a tough period for ETFs. In particular, it was fixed-income and emerging markets equities that bore the brunt. The issues are largely related to potential changes in Federal Reserve policy, and we think that will resolve itself in the coming months.

IU.com:Do you see any other issues that were coursing through those outflows?

Rosenbluth: The Fed was the main thing-concern in the fixed-income markets about interest rates moving higher and in emerging markets concern about interest rates and then signs of slower economic growth in these emerging markets.

IU.com:Are you of the mind that when a risk-on attitude again takes hold that perhaps frontier markets are going to be taken more seriously than they ever have been because they're more mature now? I'm hearing that funds like the iShares MSCI Frontier 100 ETF (NYSEArca:FM) might get traction.

Rosenbluth: We at S&P like frontier markets over emerging markets in this environment. We think there are better opportunities there. They have been gathering assets as those benchmarks and respective ETFs have done better, but they're just so much smaller than what you're going to find in terms of an asset base than the Vanguard FTSE Emerging Markets ETF (NYSEArca:VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca:EEM). The iShares Frontier Markets ETF has about $200 million, and I think money is going to move there.

But I think that the $12 billion in total outflows we saw in June masked some of the positive signs, such as U.S. equities ETFs. This is still the dominant part of ETF investing:Combined in sector and style ETFs, U.S. equities make up over 50 percent of the asset base. We saw strong growth-around $5 billion in inflows-and not just in financial services, which of course can benefit from a rising-interest-rate environment.

We also saw growth in other sector ETFs:energy saw inflows; we saw health care with inflows; we actually saw encouraging inflows into small-cap equity ETFs. I say "encouraging" because that's a domestic risk-on trade, and small-caps tend to be less interest rate sensitive because there's less debt for a lot of these companies and they tend to be more domestically focused than large-cap stocks that have more of an international focus.

IU.com:What's the biggest surprise for you in 2013 so far in the ETF market?

Rosenbluth: We've seen ETF providers continue to find new ways to slice the marketplace. We have seen some closures this year-in particular, Guggenheim closed a number of its smaller ETFs. And we've a lot of new fixed-income ETFs, both in the range of target maturity from iShares, to more senior loan and high-yield portfolios that were launched at a more risk-on time.

Rosenbluth (cont'd.): We've also continued to see investors overall move money into ETFs that have rules-based tactical slants to them. I'm not surprised by it, but I'm encouraged by it, because it shows there's still room for innovation in this industry despite the outflows we saw in June. It makes us feel optimistic about the industry's growth opportunities.

In terms of closures, we're still seeing net increases in the base, and that's a sign that even though we're seeing some closures, we're still seeing innovation. The net number of products is higher this year than it was last year, and the number of net of launches and closures is still positive. The pace has slowed in the last couple of years, but it's still positive despite maturation in the industry.

IU.com:Apart from the net launch figures, any observations about launches this year versus last year? To stoke your memory, iShares flooded the zone early in 2012 with a lot of launches, then everybody's guns went quiet for a while …

Rosenbluth: …Then it picked up toward the end of the year. Yes, I recall that as well, and as I look through what has launched this year, I see a number of taxable fixed-income ETFs launching from iShares and others. I mentioned this, but they've launched their defined maturity products-2016, 2018, 2020 and 2023. We've had a couple of senior loan ETFs that have launched:First Trust launched one and State Street launched one that follow the very successful launch of (NYSEArca:BKLN) from PowerShares.

IU.com:The one from State Street, the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca:SRLN), is the active one that's been doing quite well, right?

Rosenbluth: Yes, for a relatively new ETF, it's been gathering a good amount of assets. It has almost $350 million in assets, and it launched three months ago in April. That's a pretty rapid pace of asset- gathering.

IU.com:What about in terms of looking ahead in the world of ETFs-anything that's on your radar screen for the rest of the year you wouldn't be surprised will come to pass, or that you worry about?

Rosenbluth: What we're still waiting to see is whether the next active ETFs are going to come from traditional mutual fund companies. I don't have a crystal ball as to when those will come to pass, but Fidelity has gotten the green light to move forward, and we know of other mutual fund companies that have expressed interest in offering ETFs.

And of course there's Pimco, which has had success with the Total Return ETF (NYSEArca:BOND). Whether they continue to expand their product pipeline in light of money moving out of their flagship product and diversify is something I'm keenly interested in.

IU.com:So do you feel like this big move into active by mutual fund companies is going to happen, or might you be waiting for nothing?

Rosenbluth: I think we are going to see it; I just don't have a date in mind. I do think Fidelity has made inroads, both from a staffing perspective and in terms of its partnership with iShares that gives all indications they're going to expand from their single-ETF offering soon. How soon, I don't have a good sense, but if it's going to be a fixed-income ETF as they've indicated, then the time to launch will be when money is moving back into fixed-income ETFs. You don't want to launch a product as money is moving out of an asset class.

IU.com:I've heard a number of people say distribution will be the next big wave of development in the ETF industry. The pay-to-play arrangement that Schwab rolled out a while ago comes to mind; the BlackRock-Fidelity partnership seems to be about distribution as well. Any thoughts as to how important distribution might be?

Rosenbluth: I think it's relevant for self-directed investors that are looking for low-cost options. But for many investors looking for low-cost options while working with a financial advisor who's on a platform where that's not relevant, distribution is less important. We're going to continue to see self-directed investors have options to be able to find low-cost ways to invest.

But if anything concerns me, it's that investors are choosing an ETF based on one data point, as opposed to a more holistic, all-encompassing, what's-inside-the-portfolio and what's it going to cost sort of approach. There are a number of firms that we work with to provide third-party research to help self-directed investors sort through the thousands of options, so that if they're going it alone without an advisor, they're getting some assistance in being able to sort through that universe.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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