How ETFs Bore Up in 2008

By Kevin Grewal

The asset numbers for both exchange traded funds and mutual funds in 2008 are finally out. While mutual funds had a terrible year, the picture was a little rosier for ETFs and exchange traded notes (ETNs).

In many ways, despite a severaly volatile and depressed economy, the market for these fast-growing investment tools actually flourished:

• Net flows, which compare redemptions against creation activity, moved in the opposite direction as those of traditional open-end mutual funds. ETFs attracted nearly $178.4 billion in net inflows for the year, whereas $320 billion were pulled out of mutual funds, states Murray Coleman of Index Universe.
• ETNs showed net inflows of slightly over $2 billion in 2008, with $823 million coming in December.
• Growth minded investors turned towards bond ETFs, the Vanguard Extended Duration Treasury Index ETF (EDV) posted gains of over 50% last year.
• ETF assets only fell 13% as compared to a decline of 38.5% for the S&P 500, reports Matt Hougan of Index Universe

The month of December was the crème-de-la-crème for ETFs. Overall, industry assets for all U.S.-based ETFs gained around $50 million, and the big players in the industry like iShares and State Street’s SPDRs saw record inflows.

The SPDR Index 500 (SPY) led the pack, showing an increase in net assets of about $16 million, followed by the iShares MSCI EAFE Index (EFA), which actually got hammered last year, but still managed to grab almost $3 million in inflows, reports the National Stock Exchange.

This seems to be the beginning of a trend for ETFs. As the market makes a comeback, ETF assets and traders will only continue to grow. After all, there are several advisors and traders who still don’t utilize ETFs.

Mutual funds didn’t fare so well, though.

Many believe that the numbers represent the worst showing yet for the industry at large. Although there was a late-year rebound, there is not much hope for the disaster that is looming ahead. Joe Morris for Ignites reports that worldwide, mutual funds are reporting outflows at $320 billion, with equity funds losing $233.5 billion, bond funds $58.2 billion and balanced funds $28 billion, according to Emerging Portfolio Funds Research.

The strongest sectors were utility funds, which were down 36.4%, with four trading days left in the year; health-care funds, which were off 25.2%; and short-bias funds, up 36.2%, according to Lipper data.

Comments

[Tampa DDS:]

Nice article.

Jan 10 02:47 PM

[asleeper:]

Good information. Personally, I like ETFs and have invested in several of them in recent years, including GLD, SLV, commodities ETFs, and the Dow and S&P500 index ETFs, double index, and inverse ETFs.

A word of caution to newcomers. With every successful new thing, whether it be ETFs or the TV show "Survivor", a host of copycats are sure to follow, hoping to jump on the bandwagon.

One reason the early ETFs may have been successful is that they focused on areas doing well or likely to do well. That does not imply that every ETF that follows will do well. Once ETFs cover every conceivable market segment, then you will be right back to having to decide for yourself what sector to invest in, whether to go long or short, and when to buy or sell.

Jan 10 09:04 PM

[Conan the B...:]

I have a problem with ETFs primarily because they do cover segments. Those segments contain individual stocks some of which may be destined to fail. Wholesale buying or selling of the particular ETF will raise or lower each stock in that segment regardless of quality.

Since every Index is revised occasionally to reflect changes; replacement due to merger, acquisition, etc., do ETFs allow for similar occurances?

Jan 11 02:12 AM