By Michael Rawson, CFA
Just $1.9 billion of new money trickled into exchange-traded funds in October following the strong $33 billion that poured in during September. Investors pulled more than $11.3 billion from U.S.-stock funds, opting to put $6.5 billion to work in international stocks and $4 billion into bonds. Gold funds continued to shine, as the commodities asset class attracted $1.6 billion. Overall ETF inflows of $1.9 billion in October was the weakest monthly showing so far in 2012, and it comes amid a slowdown in new ETF issuance and a uptick in ETF closures. For the year to date, there have been only 159 ETF launches and 97 closures, for a net increase of 62, compared with a net increase of 278 in all of 2011. See the first table below.
Among Morningstar categories, China region, diversified emerging-markets, and Europe stock each attracted inflows of more than $1 billion. Emerging-markets bond also saw hearty inflows, but investors pulled back on high-yield bonds, perhaps taking profits after several months of strong inflows and returns. The category lost $800 million in investor capital.
As for fund providers, it was a clean sweep for iShares. Several of its funds were among the most popular for the month, helping iShares take in $7 billion, nearly twice the inflows of any other ETF provider despite the meager flows into ETFs overall. Vanguard came in second, taking in $3 billion, while Van Eck attracted $800 million on the strength of Market Vectors Gold Miners ETF (NYSEARCA:GDX) and Market Vectors Oil Services ETF OIH. Van Eck acquired OIH and several of the other former HOLDRs funds from Merrill Lynch last year.
During October, iShares launched a massive marketing campaign around its new "core" series of ETFs. These portfolio building-block ETFs, ostensibly geared for buy-and-hold investors, sport extremely low expense ratios. The marketing campaign included full-page advertisements in The Wall Street Journal as well as television commercials featured during such high-profile programming as the presidential debates. The marketing efforts have appeared to pay off, at least so far.
The new pricing strategy and marketing campaign is likely a response to several years of market-share losses at the hands of Vanguard, which typically undercuts iShares in nearly every category in which they compete. While Vanguard has 65 funds, iShares offers 280 and has now designated 10 of these 280 funds as "core" ETFs. However, it is not always clear how these 10 funds fit into the broader iShares lineup and why other funds did not receive a fee cut. For example, iShares MSCI Emerging Markets Index (NYSEARCA:EEM), which charges 0.67%, did not get an expense-ratio reduction. Rather, iShares launched a new, slightly broader emerging-markets fund, iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG), with an expense ratio of just 0.18%.
State Street saw outflows of more than $9 billion. SPY alone had redemptions of $7 billion, but at least some of those outflows became inflows for iShares Core S&P 500 ETF (NYSEARCA:IVV). IVV was another fund rebranded "core" by iShares, and the expense ratio was cut to 0.07%, now undercutting the more popular SPDR S&P 500 (NYSEARCA:SPY). While cheaper than the 0.09% of SPY, it still trails the 0.05% expense ratio of Vanguard S&P 500 ETF (NYSEARCA:VOO) . We have long argued that for buy-and-hold investors, IVV is a better fund than SPY because of its more modern legal structure, which results in better tracking. SPY is organized as a unit investment trust, while IVV is a regulated investment company. Still, Vanguard offers a similar product for only 0.05%.
Other popular funds for the month include SPDR Gold Shares (NYSEARCA:GLD), which brought in $800 million, and PIMCO Total Return ETF (NYSEARCA:BOND), which added $300 million to surpass the $3 billion assets under management threshold.
Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including BlackRock, Invesco, Merrill Lynch, Northern Trust, and Scottrade for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.