Lighthouse ETF Report - 2013 - August

7/29/2019 Lighthouse ETF Report - 2013 - August

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Lighthouse Investment Management

ETF Report - US listed - August 2013 Page 1

ETF Report

Exchange Traded Funds & Mutual Funds - August 2013


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Contents

Introduction .................................................................................................................................................. 3

Flows by Asset Class: Dollars ......................................................................................................................... 4

Flows by Asset Class: % of Assets.................................................................................................................. 5

IG Bonds: Flows in % of Assets ...................................................................................................................... 6

HY Bonds: Flows in % of Assets ..................................................................................................................... 7

US Equities: Flows in % of Assets .................................................................................................................. 8

International Equities: Flows in % of Assets ................................................................................................. 9

Precious Metals: Flows in % of Assets ........................................................................................................ 10

Risk Appetite: falling ................................................................................................................................... 11

Mutual Fund Flows: Domestic Equity ......................................................................................................... 12

Correlation: Equity MF Flows and S&P 500 ................................................................................................ 13

Mutual Funds Flows: International Equity .................................................................................................. 14

Mutual Fund Flows: Taxable Bond Funds ................................................................................................... 15

Mutual Fund Flows: Equity Versus Bond .................................................................................................... 16

Mutual Fund Flows: Municipal Bonds ......................................................................................................... 17

Conclusions ................................................................................................................................................. 18


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Introduction

Since the 'birth' of the first ETF

(Exchange-Traded Fund) in 1993their march towards success has

been uninterrupted. As of

September 2013, US listed ETF's

contained over $1.4 trillion in assets

under 'management'1.

With more than $9 trillion in

managed assets23, US mutual funds

are still command a much larger

pile. However, outflows frommutual funds investing in domestic

equities have persisted over the last

6 years.

Investors, discouraged by

underperformance of actively

managed funds, are switching to

ETF's with significantly lower fees

than comparable mutual funds.

It is fair to assume ETF's will

continue to grow rapidly and will

impact market performance due to

their sheer size.

To get insights into investors behavior we look at flows in and out of

the 20 largest ETF's, covering around 40% of all ETF assets.

Looking simply at assets under management is misleading, since

performance can have a significant impact on the value of assets. We

therefore look at pure flow data, ignoring the impact of

performance. The increase in assets of ETF's tracked from $520bn to

$605bn from July 2012 to January 2013 consisted of $40bn of inflows and $45bn in performance.

1Source: IndexUniverse.com

2Source: Morningstar Direct US Open-end asset flows update, January 2013

3Excluding $2.6 trillion in US Money Market Mutual Funds


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Flows by Asset Class: Dollars

One way to analyze flows is to aggregate them by asset class in dollar terms. Above you see cumulative

flows over the last 12 months.

Observations:

Real-estate inflows reduced to $3bn (from $4bn) Precious metal-related ETF's saw outflows of $14bn (12bn) International equities experienced zero (previous report: $2) billion in inflows Domestic equities saw inflows of $21bn ($22bn) Flows into high-yield bond ETF's remained negative with -$3bn (-$1bn) Investment-grade (IG) bonds reported outflows of $12bn (-$7bn)


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Flows by Asset Class: % of Assets

An inflow of $1bn does not matter much for SPY with assets over $100bn. However, it might matter for

the $5bn Russel MidCap ETF (IWR). It therefore makes sense to look at flows relative to assets.

Observations:

Real estate inflows continue to slow down (15% versus 34% at previous report) Precious-metal related ETF's saw outflows of 39% (-11%) of their assets International equity ETF flows reversed and saw outflows of 10% (inflows of 20%) US equity ETF's grew by 20% (23%) Inflows into high-yield bond ETF's decreased by 13% of AuM (increase of 3%) Investment grade ETF's saw outflows of 18% (-11%) of their assets


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IG Bonds: Flows in % of Assets

Investor preferences change, and so do flows. Looking at rolling changes in flows can reveal interesting

trends.

Observations:

Despite a sharp rise in yields, TLT (20+ year Treasury bonds) had no outflows over the past threemonths combined

TIP (Treasury inflation-protected bonds) lost about 1/6th of its assets over past 3 months Municipal bond ETF (MUB) had their third consecutive month of outflows LQD (investment-grade corporate bonds) had its ninth month of consecutive outflows, losing

$4.2bn (1/6th of assets) over the past three months


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HY Bonds: Flows in % of Assets

Observations:

The massive inflows into speculative bond ETF's seen in 2012 have reversed Junk-bond ETF (JNK) had outflows during six of the past seven months, losing $3.5bn or 26% of

assets

High-yield ETF (HYG), on the contrary, saw inflows during four out of the past six months,gaining $1.2bn or roughly 10% of assets.

Waning demand from high-yield ETF's might make it more difficult for lowly rated borrowers toaccess capital markets or could lead to stricter covenants

Leveraged buy-outs (LBO's) depend on a receptive high-yield market for financing; if inflowsstop, additional supply would likely be absorbed only at higher yields


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US Equities: Flows in % of Assets

Observations:

Nasdaq (QQQ) and Dow Jones (DIA) related ETF's have lagged overall inflows into domesticequity ETF's. This might have to do with the end of the bubble in the stock price of Apple, which

is heavily weighted in Nasdaq benchmark indices. For the Dow Jones we can only speculate

investors might finally realize the nonsensical nature of a price-weighted index.

Inflows into IWR (Russell MidCap) have caught up with its large-cap brothers

The world's largest ETF (SPY) suffered the largest outflows on record (-14bn), reversing July'srecord-breaking inflows (+13.8bn)


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Mutual Fund Flows: Domestic Equity

Observations:

Long-term domestic equity mutual fund outflows resumed in August Outflows have occurred on 26 out of the past 28 months.

Conclusions:

Retail investors see little value in paying elevated fees for active management as most fundsunderperform over longer periods

Global stock markets seem to be more driven by central bank action, which is hard to predict forindividual investors


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Mutual Funds Flows: International Equity

Observations:

Inflows into long-term international equity mutual funds continued for the eighth consecutivemonth


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Mutual Fund Flows: Municipal Bonds

Observations:

Municipal bond mutual funds experienced the largest outflows since the "Whitney" crash (onDecember 19, 2010, Meredith Whitney predicted hundreds of billions in losses from defaults on

TV)

Rating agencies are waking up to the growing hole of underfunded pension plans A rise in income tax rates would make muni bonds (tax-exempt) more attractive An abolishment of tax-preferred status of muni bonds would lead to significant losses for their

owners

Private investors owning muni bonds directly have usually not the capability to adequately judgethe risks associated with individual bonds


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Conclusions

Risk appetite in stocks has dropped further, but is still high in bonds. Emerging market equity ETF's, as indicated in our May report, continue to experience significant

outflows.

Inflows into high-yield bond ETF's have cooled off considerably, with the leading junk-bonds ETF(JNK) losing 26% of its assets over the past seven months.

"Paper-gold" ETF (GLD) continues to see large outflows and has lost 50% of today's assets overthe past eight months. Despite horrible performance, the gold mining stock ETF (GDX) benefited

from inflows for six out of the past seven months.

Both mutual equity and bonds funds experienced further outflows in August, with the proceedsapparently going in to money market mutual funds (yielding zero).

A prudent or contrarian investor would use the opportunity to shift positions into moredefensive ETF's

Any questions or feedback welcome.

[email protected]

Disclaimer: It should be self-evident this is for informational and educational purposes only and shall not be

taken as investment advice. Nothing posted here shall constitute a solicitation, recommendation or

endorsement to buy or sell any security or other financial instrument. You shouldn't be surprised that

accounts managed by Lighthouse Investment Management or the author may have financial interests in any

instruments mentioned in these posts. We may buy or sell at any time, might not disclose those actions and

we might not necessarily disclose updated information should we discover a fault with our analysis. The

author has no obligation to update any information posted here. We reserve the right to make investment

decisions inconsistent with the views expressed here. We can't make any representations or warranties as to

the accuracy, completeness or timeliness of the information posted. All liability for errors, omissions,

misinterpretation or misuse of any information posted is excluded.

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Lighthouse ETF Report - 2013 - August

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