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Lighthouse ETF Report - 2013 - August
Lighthouse ETF Report - 2013 - August
ETF Report
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Contents
Introduction .................................................................................................................................................. 3 Flows by Asset Class: Dollars......................................................................................................................... 4 Flows by Asset Class: % of Assets.................................................................................................................. 5 IG Bonds: Flows in % of Assets ...................................................................................................................... 6 HY Bonds: Flows in % of Assets ..................................................................................................................... 7 US Equities: Flows in % of Assets .................................................................................................................. 8 International Equities: Flows in % of Assets ................................................................................................. 9 Precious Metals: Flows in % of Assets ........................................................................................................ 10 Risk Appetite: falling ................................................................................................................................... 11 Mutual Fund Flows: Domestic Equity ......................................................................................................... 12 Correlation: Equity MF Flows and S&P 500 ................................................................................................ 13 Mutual Funds Flows: International Equity .................................................................................................. 14 Mutual Fund Flows: Taxable Bond Funds ................................................................................................... 15 Mutual Fund Flows: Equity Versus Bond .................................................................................................... 16 Mutual Fund Flows: Municipal Bonds......................................................................................................... 17 Conclusions ................................................................................................................................................. 18
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Source: IndexUniverse.com Source: Morningstar Direct US Open-end asset flows update, January 2013 3 Excluding $2.6 trillion in US Money Market Mutual Funds
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One way to analyze flows is to aggregate them by asset class in dollar terms. Above you see cumulative flows over the last 12 months. Observations: Real-estate inflows reduced to $3bn (from $4bn) Precious metal-related ETF's saw outflows of $14bn (12bn) International equities experienced zero (previous report: $2) billion in inflows Domestic equities saw inflows of $21bn ($22bn) Flows into high-yield bond ETF's remained negative with -$3bn (-$1bn) Investment-grade (IG) bonds reported outflows of $12bn (-$7bn)
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An inflow of $1bn does not matter much for SPY with assets over $100bn. However, it might matter for the $5bn Russel MidCap ETF (IWR). It therefore makes sense to look at flows relative to assets. Observations: Real estate inflows continue to slow down (15% versus 34% at previous report) Precious-metal related ETF's saw outflows of 39% (-11%) of their assets International equity ETF flows reversed and saw outflows of 10% (inflows of 20%) US equity ETF's grew by 20% (23%) Inflows into high-yield bond ETF's decreased by 13% of AuM (increase of 3%) Investment grade ETF's saw outflows of 18% (-11%) of their assets
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Investor preferences change, and so do flows. Looking at rolling changes in flows can reveal interesting trends. Observations: Despite a sharp rise in yields, TLT (20+ year Treasury bonds) had no outflows over the past three months combined TIP (Treasury inflation-protected bonds) lost about 1/6th of its assets over past 3 months Municipal bond ETF (MUB) had their third consecutive month of outflows LQD (investment-grade corporate bonds) had its ninth month of consecutive outflows, losing $4.2bn (1/6th of assets) over the past three months
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Observations: The massive inflows into speculative bond ETF's seen in 2012 have reversed Junk-bond ETF (JNK) had outflows during six of the past seven months, losing $3.5bn or 26% of assets High-yield ETF (HYG), on the contrary, saw inflows during four out of the past six months, gaining $1.2bn or roughly 10% of assets. Waning demand from high-yield ETF's might make it more difficult for lowly rated borrowers to access capital markets or could lead to stricter covenants Leveraged buy-outs (LBO's) depend on a receptive high-yield market for financing; if inflows stop, additional supply would likely be absorbed only at higher yields
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Observations: Nasdaq (QQQ) and Dow Jones (DIA) related ETF's have lagged overall inflows into domestic equity ETF's. This might have to do with the end of the bubble in the stock price of Apple, which is heavily weighted in Nasdaq benchmark indices. For the Dow Jones we can only speculate investors might finally realize the nonsensical nature of a price-weighted index. Inflows into IWR (Russell MidCap) have caught up with its large-cap brothers The world's largest ETF (SPY) suffered the largest outflows on record (-14bn), reversing July's record-breaking inflows (+13.8bn)
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Observations: In good times, investors feel confident and venture abroad in search of higher returns; in bad times, the flows reverse Broad international equity ETF (EFA) saw inflows for three out of the past four months Emerging Markets ETF (EEM) suffered outflows in six out of the past seven months, losing $11.5bn, or 33% of today's assets Emerging Markets ETF (VWO), too, saw large outflows in five out of the past six months, shedding $5.7bn, or 12% of assets Once again, flows followed price movements
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Observations: "Paper-gold" ETF "GLD" experienced eight consecutive month of outflows with a combined $20bn, or 50% of today's assets, leaving the ETF Flows into the Senior Gold Miners ETF (GDX) were concentrated over two months (August and September 2011), coinciding with the all-time high in spot gold prices ($1,923/oz), but have picked up recently Silver ETF (SLV) reported inflows of $400m over the past two months
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Here, we calculate the ratio between two sub-groups of the same asset class: speculative bond (HYG, JNK) to non-speculative bond ETF's (TLT,TIP, BND, LQD, MUB) international equity (VWO, EFA, EEM) to domestic equity ETF's (SPY, QQQ, IVV, VTI, DIA, IWR)
We used relative assets under management instead of relative flows as the time series are quite volatile. Observations: Risk appetite is cooling off based on investor's preference for domestic over international equities. Risk appetite is still near record levels in terms of high yield bond versus investment grade bond inflows
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Observations: Long-term domestic equity mutual fund outflows resumed in August Outflows have occurred on 26 out of the past 28 months.
Conclusions: Retail investors see little value in paying elevated fees for active management as most funds underperform over longer periods Global stock markets seem to be more driven by central bank action, which is hard to predict for individual investors
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Observations: Despite few months of equity MF inflows (dots above the horizontal zero line) a certain positive correlation exists with the performance of the S&P 500 Index However, excluding the two extremes (October 2008, April 2009), the coefficient of determination declines considerably (r2 = 0.28 instead of 0.45) Using 3-months data does not lead to significant improvements in the coefficient of determination (r2 = 0.51; 0.26 excluding extremes)
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Observations: Inflows into long-term international equity mutual funds continued for the eighth consecutive month
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Observations: Taxable bond mutual funds continue to suffer from very large outflows ($65bn over the past 3 months)
Factors contributing to sharp increase in 10-year US Treasuries (from 1.6% to 3.0% since May): Selling of TIPS (Treasury Inflation Protected Securities) as Fed seems to have given up on N-GDP (and implicit inflation-) targeting introduced only at the end of 2012 Selling of Treasury bonds as a hedge for rising mortgage rates ("convexity vortex") Investors no longer willing to hold bonds at negative real yields as Fed's talk of tapering QE sowed doubt regarding its credibility in terms of fighting deflationary trends Unwinding of long bond positions by macro hedge funds ('risk parity strategy') Unwinding of carry trade in Eurodollar futures
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Observations: Outflows from domestic equity mutual funds have stopped Investors continue to withdraw money from bond funds $31bn have been added to retail money market mutual funds
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Observations: Municipal bond mutual funds experienced the largest outflows since the "Whitney" crash (on December 19, 2010, Meredith Whitney predicted hundreds of billions in losses from defaults on TV) Rating agencies are waking up to the growing hole of underfunded pension plans A rise in income tax rates would make muni bonds (tax-exempt) more attractive An abolishment of tax-preferred status of muni bonds would lead to significant losses for their owners Private investors owning muni bonds directly have usually not the capability to adequately judge the risks associated with individual bonds
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Disclaimer: It should be self-evident this is for informational and educational purposes only and shall not be taken as investment advice. Nothing posted here shall constitute a solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. You shouldn't be surprised that accounts managed by Lighthouse Investment Management or the author may have financial interests in any instruments mentioned in these posts. We may buy or sell at any time, might not disclose those actions and we might not necessarily disclose updated information should we discover a fault with our analysis. The author has no obligation to update any information posted here. We reserve the right to make investment decisions inconsistent with the views expressed here. We can't make any representations or warranties as to the accuracy, completeness or timeliness of the information posted. All liability for errors, omissions, misinterpretation or misuse of any information posted is excluded. +++++++++++++++++++++++++++++++++++++++ All clients have their own individual accounts held at an independent, well-known brokerage company (US) or bank (Europe). This institution executes trades, sends confirms and statements. Lighthouse Investment Management does not take custody of any client assets.
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