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ETF assets rise in 2011

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In 2011, exchange-traded fund (ETF) assets increased USD51 billion, or 5.1%, according to the ETF Industry Association. As of year-end 2011, ETF assets totaled USD1.045 trillion, among 1,166 products (including 26 funds of funds).

Although other ETF asset classes, such as fixed income and commodities, have grown rapidly, equities (excluding the real estate category) still accounted for 70% of ETF assets at year end.

This included USD501 billion in US equity ETFsv and USD231 billion in global/international equity ETFs, according to the ETF Industry Association. The association reports that net cash inflow for ETFs in December 2011 was USD16 billion, bringing the full-year total to USD115 billion, or 2.1% above 2010.

“With stock performance in major global equity markets generally flat to down in 2011, we think the cash flow into ETFs indicates that this investment medium continued to gain favour, likely picking up market share from traditional mutual funds and ownership of individual stocks,” says Tom Graves of S&P Capital IQ.

In 2011, the S&P 500 was up 2.1% on a total return basis, with a price only decline of 0.003%. In comparison, the S&P Global ex/US BMI had a 14.9% price decline. As indications of weakness in international stocks, the S&P Europe 350 was down 13.5%, the S&P Asia 50 declined 15.5%, and the S&P Latin America 40 was down 20.7%.

“In the year ahead, we expect that ETFs will continue to gain market share from mutual funds and individual securities, reflecting greater investor awareness of ETFs as an investment choice, and appreciation of prospective advantages that ETFs offer,” says Graves. “We think that growth in the ETF market adds to pressure on mutual fund companies and other financial service companies to offer ETF products.”

The three top ETF providers had a combined market share at year-end 2011 of about 85%, according to the ETF Industry Association. BlackRock led with 43%, followed by State Street (25%) and Vanguard (16%). However, despite the concentration at the top of the asset size rankings, we have seen newer ETF providers make significant in-roads, helped by innovative product, strong distribution capability, or lower costs.

Meanwhile, although a USD1.045 trillion market averages to about USD897 million per ETF, the assets are quite concentrated among the larger funds. According to the ETF Industry Association, as of year-end 2011, the 10 largest ETFs accounted for about 36% of total ETF assets, led by State Street’s SPDR S&P 500 ETF Trust (SPY 128, Overweight) and SPDR Gold Shares (GLD 158, Not Ranked) at USD95 billion and USD63 billion, respectively. (Note: All S&P rankings on ETFs are as of January 6, 2012).

BlackRock had five ETFs among the 10 largest, led by fourth-ranked iShares MSCI EAFE Index Fund (EFA 50, Marketweight), with about USD37 billion of assets. Vanguard had two of the top 10, including third-ranked Vanguard Emerging Markets Stock Index Fund; Vanguard MSCI EM ETF (VWO 39, Marketweight), at about USD42 billion. PowerShares QQQ (QQQ 58, Overweight) was seventh at about USD26 billion.

Among the 20 largest ETFs are 13 that are viewed by S&P Capital IQ as having an equity emphasis, plus six income ETFs and one ETF in the commodity category. As of January 6, 2012, S&P Capital IQ Equity Research’s propriety ranking system had an Overall ranking of Overweight on nine of these large equity ETFs, a Marketweight appraisal on two, an Underweight ranking on one, and no ranking available on the 13th of these equity ETFs.

In addition to SPY and QQQ, the top-ranked large ETFs included iShares S&P 500 Index Fund (IVV 129, Overweight), Vanguard Total Stock Market Index Fund; ETF Class Shares (VTI 66, Overweight), iShares Russell 1000 Growth Index Fund (IWF 59, Overweight), iShares Russell 200 Index Fund ((IWM 75, Overweight), iShares Russell 1000 Value Index Fund (IWD 65, Overweight), SPDR Dow Jones Industrial Average ETF Trust (DIA 124, Overweight), and iShares Dow Jones Select Dividend Index Fund (DVY 54, Overweight).

Among the nine top-ranked large equity ETFs, seven received an Overweight appraisal in the Performance Analytics category. In this category, the metrics include holdings-based appraisals from S&P Capital IQ equity analysts and from S&P Capital IQ’s proprietary quantitative Fair Value system, as well as an S&P Capital IQ Technical assessment of the ETF security.

Four of the nine ETFs received an Overweight ranking in the Risk Considerations category, where S&P Capital IQ utilises such holdings-related metrics as S&P Quality Ranking, S&P Credit Rating, plus an assessment of the ETF’s standard deviation (a measure of price volatility). In the Cost Factors category, all nine of the top-ranked equity ETFs fared relatively well. This category includes such analytics as gross expense ratio and bid/ask spread. Seven of these nine ETFs had a relatively favourable gross expense ratio of 0.20% or less.

Net cash flow into US equity ETFs totalled USD44.6 billion in 2011, versus an inflow of USD33.4 billion in 2010. By comparison, net cash follow of global/international equity ETFs totalled USD16.5 billion, a decline of 59% from USD40.2 billion in 2010. NSX’s equity categories exclude some real estate-related ETFs that may own equities). Among equity ETFs, VWO had the largest net cash inflow (USD7.8 billion) in 2011, followed by SPY (USD6.3 billion) and EFA (USD5.4 billion).

Investor interest in fixed income ETFs was also quite strong in 2011. Net cash inflow was USD46.7 billion, up 59% from the year before, and accounted for 41% of the total net cash inflow for ETFs. Fixed income ETF assets totalled USD184 billion at year-end 2011, up 35% (USD47.2 billion) from year-end 2010. Meanwhile, in NSX’s commodity ETF category, assets totalled USD100 billion (9.6% of the ETF total) at year-end 2011, up USD3.9 billion, or 4.1%, from year-end 2010. More than half of the commodity assets were in GLD.

However, according to the ETF Industry Association, there was a net cash outflow of USD2.6 billion in December 2011, which we suspect was partly attributable to concern about downward movement in the price of gold. In all of 2011, commodity ETFs had net cash inflow of USD807 million, down from USD10.3 billion the year before.

Although the overall ETF market has grown rapidly in the US, we believe its total assets are still quite small relative to mutual funds. We see the appeal of mutual funds being bolstered by the wide range of choices they offer, and the prospect that active management can provide index-beating returns. S&P Capital IQ US Equity Research offers reports on thousand of mutual funds, and on more than 600 equity ETFs, as we aim to help investors differentiate among them on the basis of performance, risk and cost.

In S&P Capital IQ Equity Research’s holistic approach to looking at equity ETFs, up to 10 analytical elements are utilised in arriving at comparative rankings. As of January 6, 2012, S&P Capital IQ Equity Research had an Overall ranking on 633 equity ETFs, including 107 that were launched in 2011.

 

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