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ETF Flows Turn Positive in the First Quarter

Yield-hungry investors also loaded up on junk bonds, while rate hike fears push fixed-income investors to the short end of the yield curve.

John Gabriel, 04/20/2010

Investors plowed some $19.7 billion into ETFs in March. Those inflows helped push total net inflows for the ETF industry to $7.7 billion for the first quarter of 2010.

At month's end, total ETF assets stood at $815 billion, up from $764.6 billion at the end of February and up from $484 billion a year ago.

Short Duration and Junk Bonds Rule in March
After 30 consecutive months of net inflows, iShares Barclays TIPS Bond's TIP streak came to an end in March, as the fund experienced $73.6 million in net outflows. It's worth noting that owner's equivalent rent has increased to 24% of the reported CPI figures and has a disproportionate influence on this statistic. Remember that principal adjustments for TIPS are linked to changes in the CPI, but most investors own their homes and have seen other daily expenditures (such as energy and food prices) rise. As such, many could be hunting for inflation protection elsewhere--namely in equities and commodities.

Potential interest-rate hikes are on investors' minds as they continue to shift their fixed-income exposures to the short end of the yield curve. IShares Barclays Short Treasury Bond SHV led the taxable bond asset class with $1.7 billion in net inflows in March, followed by iShares Barclays 1-3 Year Credit Bond CSJ, which added another $423.1 million in March. Conversely, iShares Barclays 20+ Year Treasury Bond TLT led taxable bond outflows with $133.0 in net redemptions for the month.

Yield-hungry investors also loaded up on junk bonds, as iShares iBoxx $ High Yield Corporate Bond HYG and SPDR Barclays Capital High Yield Bond JNK took in $464.3 million and $451.7 million last month, respectively. With trailing one-year returns of about 30%, it is possible that new shares were created to be lent to short sellers. However, we would wager that most of the inflows represented "long" demand, as shorting these funds would be rather expensive (relative to say, credit default swaps) because of their hefty coupon payments.

Investors Pile into the SPDRs and Cubes and Dump Small-Caps
Funds offering broad index exposure fared well in March, with SPDRs SPY, PowerShares QQQ QQQQ, and iShares S&P MidCap 400 IJH all making the overall top-10 inflows list for the month, pulling in $3.4 billion, $1.7 billion, and $451.1 million, respectively. On the flipside, iShares Russell 2000 Index IWM and Vanguard Small Cap VB saw net outflows of about $996.4 million and $441.0 million, respectively.PAGEBREAK

VWO Continues to Chip Away at EEM
Vanguard Emerging Markets VWO attracted another $784.0 million last month and $2.8 billion in the first quarter. The bifurcation of flows between VWO and iShares MSCI Emerging Markets EEM is well documented by now. Last month EEM shed another $719.4 million and through the first quarter has seen more than $4.2 billion head for the exits. Single-country funds topping international equity inflows with more than $200 million in net inflows included iShares MSCI Hong Kong EWH, iShares MSCI Australia EWA, iShares MSCI Canada EWC, Market Vectors Russia RSX, and iShares MSCI Mexico Investable Market EWW. In contrast, iShares FTSE/Xinhua China 25 FXI and iShares MSCI Japan EWJ saw net outflows $289.2 million and $119.2 million, respectively.

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