What are ETF and Mutual Fund flows telling us?

We often look to the ETF marketplace for clues into the sentiment of investors.  A few of the key data points that we review are total assets and fund flows; creations and redemptions, each quarter.  Below, as a point of reference, are the top largest ETFs, as measured by total assets, as of the end of the 1st quarter.  The constituents of this list have not changed much in recent quarters.

Top 10 Largest ETFs (Assets) as of March 31, 2012

TickerNameMorningstar CategoryAssets ($M)
SPYSPDR S&P 500Large Blend105,640.2
GLDSPDR Gold SharesCommodities Precious Metals69,014.5
EEMiShares MSCI Emerging Markets IndexDiversified Emerging Markets39,597.4
EFAiShares MSCI EAFE IndexForeign Large Blend38,104.6
QQQPowerShares QQQLarge Growth35,676.5
IVViShares S&P 500Large Blend29,978.9
TIPiShares Barclays TIPS BondInflation-Protected Bond22,282.9
VTIVanguard Total Stock MarketLarge Blend21,470.3
LQDiShares iBoxx $ Investment Grade Corporate BondLong-Term Bond19,853.7
IWFiShares Russell 1000 GrowthLarge Growth16,675.3

Source:  State Street Global Advisors, ETF Industry Guide, as of March 31, 2012.

ETF flow information for the 1st quarter of 2012, however, tells a very intriguing story.  The story for ETFs, in fact, appears to be slightly different than the 2012 YTD story for mutual fund flows.  With respect to the latter, stock-based mutual fund outflows rose to $1.19 Billion in February (this marked the 10th month in a row of net outflows) as flows to bond-oriented mutual funds rose according to Investor’s Business Daily.

On the ETF front, while we did see some positive net flows into bond-oriented ETFs (notably High Yield Bonds), we also observed significant funds flowing into domestic and international – emerging market equity products.  In terms of outflows, or redemptions in this case, funds were flowing out of a wide variety of Morningstar categories, albeit only slightly on the bond-oriented front.

Top 10 ETF Creations for Q1 2012

Ticker NameMorningstar CategoryNet Flows ($mm)
VWOVanguard MSCI Emerging MarketsDiversified Emerging Markets6,443.82
QQQPowerShares QQQLarge Growth4,224.53
HYGiShares iBoxx $ High Yield Corporate BondHigh Yield Bond3,485.85
JNKSPDR Barclays Capital High Yield BondHigh Yield Bond2,826.00
EEMiShares MSCI Emerging MarketsDiversified Emerging Markets2,694.26
LQDiShares iBoxx $ Investment Grade Corporate BondLong-Term Bond2,398.06
VXXiPath S&P 500 VIX Short-Term Futures ETNVolatility1,998.35
GLDSPDR GoldCommodities Precious Metals1,872.65
VIGVanguard Dividend AppreciationLarge Blend1,296.71
VNQVanguard REITReal Estate1,238.03

Source:  Index Universe, as of March 31, 2012

Top 10 ETF Redemptions for Q1 2012

Ticker NameMorningstar CategoryNet Flows ($mm)
EFAiShares MSCI EAFEForeign Large Blend-2,428.28
EWZiShares MSCI BrazilLatin America Stock-1,354.61
XLUUtilities Select SPDRUtilities-1,101.83
SPYSPDR S&P 500Large Blend-942.06
IWMiShares Russell 2000Small Blend-923.43
SHYiShares Barclays 1-3 Year Treasury BondShort Government-852.27
MDYSPDR S&P MidCap 400Mid-Cap Blend-642.22
TNADirexion Daily Small Cap Bull 3xTrading-Leveraged Equity-614.50
BILSPDR Barclays Capital 1-3 Month T-BillUltrashort Bond-591.20
UUPPowerShares DB U.S. Dollar Index BullishCurrency-581.65

Source:  Index Universe, as of March 31, 2012

Disclosure:  Hennion & Walsh Asset Management currently has allocations within its managed account program to LQD, EEM, EWZ, XLU and EFA.

I believe that the divergence in fund flow information for the first quarter of 2012 may primarily be related to the types of investors who generally invest in the products.  Institutional investors continue to gravitate towards ETFs for a wide variety of reasons while retail investors, fueled in large part for 401(k)/Defined Contribution Plan investments, use a great deal of mutual funds for their own household portfolios.

It is our current contention at Hennion & Walsh that Main Street (i.e. retail investors) is not buying in right now to the overly bullish sentiment of the markets, but Wall Street (i.e. institutional investors) is seemingly full steam ahead.  Hence, recent ETF and mutual fund flow information would seem to support our contention as individual investors seem to be pulling back on stock fund investments and reallocating to bond fund investments while institutional investors appear to be searching for areas of additional growth in emerging market and domestic equity ETFs as well as alternative ETFs (Ex. Gold and Real Estate).

We will continue to monitor the fund flows associated with these two popular security types and report back on any important trend changes as necessary.