According to a survey of 840 investment professionals, 67 percent identified ETFs as the most innovative investment vehicle of the last two decades
National Stock Exchange, Inc. recently released Exchange-Traded Fund (ETF) and Exchange-Traded Note (ETN) data for June. Some highlights:
As the data shows, ETFs and ETNs continue to log impressive gains in investor assets. With their low cost structure, flexibility, transparency, tax efficiency, and wide asset class coverage, it’s clear that ETFs and ETNs are quickly becoming the preferred investment vehicle for all types of investors.
Most individual investors have the overwhelming majority of their equity investments in the US stock market. Investment professionals have historically encouraged this allocation under the slogan of ‘efficient frontier’, that a domestic overweight portfolio will reduce their risk and improve their returns over time.
The problem with that approach is that it ignores both recent and future economic trends. In fact, the case can be made that you are in fact reducing your potential returns and increasing your risk with a domestic heavy portfolio.
The chart below shows the market capitalizations of the US and non-US stock markets over the past ten years. As you can see, the value of the US stock market as a percentage of total world stock market valuation has been steadily decreasing. Had you been overweight international markets past ten years you would have been better off.
Some of that trend has no doubt been due to a decline in the value of our currency, but the majority of the change is do to the shifting sources of economic growth in the world.
A fair question might be, “that was the past ten years; how do you know the same trends will continue in the future?” I can’t answer that question with certainty, but with our economy in a mini-great depression, our budget deficits and debt growing by the trillions, and emerging markets continuing their torrid economic growth, it seems apparent to me a turnaround in that trend is unlikely anytime soon.
Protect yourself and be smart. Take another look at your allocation to international markets, and especially emerging ones.
This past week saw a highly diverse group of new ETFs launch, a continuation of the rapid development in the space as investors demand access to previously unattainable asset classes, countries, niche markets, or investment strategies. Investors have taken notice of the powerful ability of ETFs to gain exposure to new areas and ETF providers are responding in an attempt to quell investors’ insatiable appetite. This week’s offerings display innovation in the industry:
In addition, on July 2nd, iShares reached an agreement with Peru’s pension funds allowing for the creation of the first Peruvian ETF in the US, the iShares MSCI All Peru Capped Index Fund. The Peruvian pension funds will essentially exchange shares of local companies in exchange for shares of the ETF. Because of the lack of liquidity in the Peruvian market, this arrangement allows Barclays to access shares of companies that would otherwise be extremely difficult to acquire. Peru’s Lima General Index is up 86% so far this year.
Recently the Investment Company Institute (www.ici.org) released May statistics on fund flows for mutual funds and exchange traded funds. Here’s what we gleaned from the May and prior months’ numbers:
Assets held in mutual funds and ETFs have risen dramatically since the end of February, owing to a combination of appreciation in market value and net capital inflows (net share creations).
In May both ETFs and mutual funds extended their asset growth at rates similar to March and April. For the three month period, ETF assets grew by 29% vs. 22% for non-money market mutual funds.
Interestingly, roughly 20% of ETF asset growth during the period was due to net capital inflows into ETFs, whereas only about 7% was due to net new share creations in mutual funds.
Also worth noting, 95% of March/April/May net mutual fund share creations were in the form of bond funds. 46% of ETF share creations were of the bond variety.
| Assets, Share Creations | Mutual Funds | ETFs | |||||
| (billions of dollars) | |||||||
| Month | Month | ||||||
| Non- | on | on | |||||
| Money | Money | Month | Month | ||||
| All | Market | Market | Chg | All | Chg | ||
| Feb | 9,038 | 3,890 | 5,148 | 450 | |||
| Mar | 9,249 | 3,816 | 5,433 | 5.5% | 482 | 7.2% | |
| Apr | 9,700 | 3,792 | 5,909 | 8.8% | 530 | 9.9% | |
| May | 10,074 | 3,767 | 6,307 | 6.7% | 582 | 9.9% | |
| Change, 2/28 – 5/31 | 1,036 | (123) | 1,159 | 132 | |||
| 11.5% | -3.2% | 22.5% | 29.4% | ||||
