ETF Update: Investors Flee Mutual, 130/30 Funds, October ETF Asset Report, Emerging Markets Bond ETFs

Investors Flee Mutual, 130/30 Funds for ETFs

According to one study, it appears that the actively managed mutual fund is out and other investment tools such as structured notes, 130/30 funds, separately managed accounts and ETFs are in.

Financial Research Corp. studied the market and found that the market share is being divided up much differently than before, when mutual funds were in their heyday.

Cheaper alternative vehicles are increasingly the choice among financial advisors, as well. The Boston-based research study found that 70% of advisors surveyed think the actively managed mutual fund is still the best bet for international investing, and 50% think that they are the tool of choice for large-cap equity investing, reports Sue Asci for InvestmentNews.

However, the demand for traditional large-cap domestic equity may be fading out. From 1997-2007 this seemed to be the asset class of choice, nearly doubling its assets. But over the past three years the category is down to single digit-growth.

On the other hand, alternative investments such as long-short funds have grown 35% over the past decade. Asset allocation funds (such as target date funds) have had a compound annual growth rate of 28.7%.

October ETF/ETN Asset Report

National Stock Exchange [NSX] released their monthly U.S.-listed ETF and ETN report for the month ending October.

Assets totaled almost $493 billion at the end of October, a decrease of 17.6% from October 2007’s month-end assets of $598 billion. MarketWatch reports the net cash inflows for the month of October 2008 were $6.8 billion, bringing the total net cash flow for calendar year 2008 to over $109 billion.

ETF/ETN notional trading volume during October totaled a record $3.3 trillion, representing 38% of all U.S. equity trading volume, of 806 listed products. The total number of products is up from 627 one year ago.

Emerging Markets Bond ETFs Put to the Test

We’re hovering around the one-year anniversaries for two emerging market bond ETFs. While it’s been a challenging year around the globe, these funds have made their own contributions to ETF investing.

Both the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) and the iShares JP Morgan USD Emerging Market Bond Fund (EMB) have given investors inexpensive access to markets that were hard to gain exposure to and at a decent price.

Kyle Walker for Index Universe says that the other major appeal of both ETFs is their low correlation to U.S. markets over longer periods and the potential of equity-like returns.

Walker has found that the funds have a low, long-term correlation to the S&P 500, with 0.57 for PCY and 0.59 for EMB. However, this year that isn’t the case, because of a major sell-off and widespread global credit problems. PCY is down 25.2% year-to-date, while EMB is down 14.9%. This year has seen many investors running from commodity-based countries, as well as high-yielding and high-risk debt portfolios.

EMB’s and PCY’s holdings are dollar-dominated, so the underlying debt holdings are issued in U.S. dollars. This removes a certain level of volatility that changes in currency can cause, while at the same time removing any ‘falling-dollar hedge’ from the funds.

Both funds carry primarily government-issued debt, known as “sovereign debt.”

PCY is more concentrated, wtih 25 holdings. The countries are equally weighted along with all issues within in country, so as to avoid overweighting countries with a greater debt burden. EMB holds 40 issues and carries some nonsovereign debt. Within its index, each country with higher debt is limited and the excess is reallocated to those with lower debt.

Comments

[whidbey:]

very nice review, thank you.

I am interested in emerging Mkt debt, EMB, but I am concerned that the effects of the global down turn will damage the EM economies disproportionally. God knows the emerging markets need to grow and attract capital, but management is also short. ECRI has said that worldwide inflation is waning; what they did not say was whether we should be concerned over disinflation (mild inflation is good for economic growth), or even deflation which is easily sparked in EMs.

2008 Nov 08 12:59 PM