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ETF investors favored US large-cap equities, higher-risk bonds in April


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ETF investors favored US large-cap equities, higher-risk bonds in April

Todd Rosenbluth is director of ETF and mutual fundresearch at S&P Global Market Intelligence. The S&P Global MarketIntelligence rankings for exchange-traded funds and mutual funds, availablethrough MarketScope Advisor, are quantitatively derived and based onperformance, risks, costs and a qualitative analysis of the underlyingholdings. For important regulatory information, please click here.

Exchange-tradedfund investors shifted focus in April, pushing money into large-cap U.S.equities and pulling money from pure U.S. Treasury funds, according to datafrom Two other trends, money flowing into corporate and broader marketbond ETFs and out of developed international equities, remained intact. Intotal, investors added $16.62 billion of new assets to ETFs during the monthand $41.53 billion through the first four months of 2016.

U.S.large-cap equity ETFs collectively gathered $3.33 billion of new assets inApril, erasing prior outflows and bringing year-to-date net inflows to $318.5million. Five of the 10 biggest asset gatherers focused on U.S. equities, ledby SPDR S&P 500 ETF Trust (SPY), with $1.66 billion of inflows. The ETFoffered by State StreetCorp. unit SSgA FundsManagement Inc. is the largest product in the industry, with$185.35 billion in assets. Vanguard S&P 500 Index Fund ETF (VOO), whichtracks the same large-cap index, had $918.2 million in net client flows. SPYhas a higher expense ratio than VOO, but trades more frequently, appealing moreto institutional investors. market equity was the second-strongest ETF segment, with $2.16 billion ofinflows in April. The most favored ETF in this group was iShares MSCI USAMinimum Volatility ETF (USMV). The smart-beta fund, managed by , holds large- and mid-capstocks that exhibit the lowest volatility within their sectors.

Thelargest segment outflows in April came from Japan and developed Europe-focusedETFs, continuing a multi-month negative trend. iShares MSCI Japan ETF (EWJ) hadoutflows of $1.39 billion in April, the most of any ETF, while iShares MSCIEurozone ETF (EZU) and WisdomTreeInvestments Inc.'s Europe Hedged Equity Fund ETF (HEDJ) shed acombined $1.58 billion of assets.

Arecent bright spot in the international equity space is iShares MSCI EmergingMarkets ETF (EEM), which gathered $793.7 million of new money and recorded atotal return of 0.50% last month. In March, EEM had $4.62 billion of inflows and a return of13.18%.

U.S.fixed-income ETFs gathered $33.98 billion through the first four months of2016. Investors took on additional credit risk within the space during themonth of April, rotating away from U.S. Treasurys. S&P Global MarketIntelligence U.S. strategist Sam Stovall thinks successive months of decliningindustrial production, along with weaker-than-expected durable goods orders,caused the Federal Reserve to keep short-term rates unchanged and encouragedinvestors to seek out higher income alternatives.  

Pure-playTreasury bond ETFs saw net outflows in April, reversing the first-quartertrend. After gathering nearly $1 billion in new money during the first threemonths of 2016, short-term and ultra-short term Treasury funds in aggregateexperienced almost $2 billion of outflows in April. iShares 1-3 Year TreasuryBond ETF (SHY) was a big mover in April, with withdrawals of $1.15 billion. Inthe first quarter, SHY had added $49.2 million of new money.

InApril, investors continued to build exposure to corporate and broad marketinvestment grade bond ETFs. iShares iBoxx $ Investment Grade Corporate Bond ETF(LQD) had net inflows of $1.36 billion last month, the second-highest tally inthe industry. LQD holds approximately 43% of its assets in bonds rated BBB orequivalent, with virtually the remainder of the portfolio rated even higher.iShares Core U.S. Aggregate Bond ETF (AGG) pulled in $884.8 million of newmoney, while Vanguard Total Bond Market Index Fund ETF (BND) added $834.3million. Both of those funds hold a mix of agencies, investment gradecorporates, mortgages and Treasurys. BND is managed by , which topped allETF providers last month in terms of net flows.

Accordingto S&P Global Ratings Services, the investment grade composite creditspread was 198 basis points at the end of April, 20 basis points narrower thana month earlier. Among bonds rated BBB, the spread tightened 24 basis points,reflecting higher demand for bonds with moderate credit risk.

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