Investors Change ETF Strategies

July 22, 2009 ( - According to the 2009 ETF Mid-Year Review: Follow The Flows from State Street Global Advisors, U.S. ETF asset flows were marked by a continued shift away from Large Cap and Developed International equities during the first half of the year and into emerging markets and defensive assets classes that include commodities and investment grade corporate bonds.

Key themes State Street noted in its report include:

  • The continued success of inverse/leveraged products;
  • A practical approach for commodity exposure;
  • Increasing acceptance and application of fixed income ETFs;
  • Resurgence in demand for emerging market products; and
  • Inflationary fears persist.

Amid the turmoil of the last year, one constant has been the growth in inverse and leveraged products, according to the report. At the beginning of 2008, the inverse/leveraged category had just $11 billion in assets, but by the end of June 2009, that number had swelled to more than $32 billion alongside a 86% increase in the number of products. Moreover, in June, three of the top ten ETFs in terms of notional dollar volume were leveraged or inverse products, trading north of $1.5 billion  per day.

Commodity products have accounted for 53% of the industry net flows YTD despite making up just 3% of listed ETFs. Moreover, the category’s 65% increase in assets is well beyond that of any other category

The report pointed out that as recently as the end of 2006 there were only six fixed income ETFs with $20.3 billion in assets, which at the time, represented just 4.8% of total industry assets. Today there are 63 products that command 13% of the ETF market The increased acceptance and application of fixed income ETFs is a trend that is likely to continue, State Street said. Fixed income ETFs grew from nearly $60 billion in assets at the end of 2008 to over $70 billion by June 2009.

After what State Street called a horrific year in 2008 and a sluggish start to begin the New Year, emerging markets rallied to post gains of 16.5% and 19.9% in April and May, respectively. The flows into emerging market ETFs have mirrored this resurrection in performance.

Finally, the report noted that recent flows suggest that investors may be awakening to the prospect of inflation on the not so distant horizon. Net cash flows into domestic inflation-linked ETFs totaled $986 million in June 2009, more than double the monthly average for the prior 17 months.

A copy of the report can be downloaded from . A free registration is required.