Investors Dip Their Toes in Emerging Markets

The ETF industry enjoyed another month of net cash inflows in April. With the stock market rally from the early March lows continuing to gain steam, ETFs gathered about $9.5 billion in net new inflows for the month (leveraged ETFs accounted for about 27% of total industry inflows). While the S&P 500 Index has rallied an impressive 34% since hitting the current cycle lows on March 9, we'd caution investors not to get caught up in blind optimism. It does appear that there are some "green shoots" in the economy (to borrow the phrase popularized by Fed chairman Ben Bernanke in a recent 60 Minutes interview), however, there are still plenty of factors--namely rising unemployment and a debt-laden U.S. consumer--that suggest some prudence is warranted.

The bulls and bears are likely to continue duking it out in the debate over whether the market's strong performance over the past several weeks is a bear-market rally or the emergence of a new bull market. (Note: We've already technically satisfied the definition of a bull market, which would be a 20%-plus appreciation of the major market indexes). Whichever side of the debate you're on, it can sometimes be helpful to track fund flows to see where other investors are putting money to work, or which investments others are selling en masse.

The table below shows the 10 ETFs that experienced the highest net inflows in April. Interestingly,  UltraShort S&P500 ProShares (SDS) saw the largest net new investments for the month. We wouldn't place too much weight on this trend though; as with all leveraged and inverse products, the holding period is typically extremely short. Still, with the market stretching out its multiweek rally, we can infer that some intrepid traders were betting on a pullback in April. ( Short S&P500 ProShares (SH) clocked in at number 14 on the inflows list, as it brought in more than $421 million in assets for the month.)

Top ETF Inflows in April 2009
	Estimated Net Inflow ($MIL)	AUM ($Mil)	YTD % Change
UltraShort S&P500 ProShares (SDS)	1,638	3,630	-17
iShares MSCI Emerging Markets Index (EEM)	1,160	25,768	25
iShares iBoxx $ Invest Grade Corp Bond (LQD)	1,128	10,645	-3
Direxion Daily Financial Bear 3x Shares (FAZ)	1,055	1,308	-82
MidCap SPDRs (MDY)	806	6,934	9
UltraShort Financials ProShares (SKF)	773	1,499	-53
iShares Barclays TIPS Bond (TIP)	746	12,075	1
iShares MSCI Brazil Index (EWZ)	673	6,057	42
UltraShort Real Estate ProShares (SRS)	633	1,113	-58
iShares iBoxx $ High Yield Corporate Bond (HYG)	461	2,773	3

Many investors seem to be dipping their toes back into risk assets, as emerging-markets equities attracted impressive inflows;  iShares MSCI Emerging Markets (EEM),  iShares MSCI Brazil (EWZ),  iShares FTSE/Xinhua China (FXI)*,  Vanguard Emerging Markets (VWO)*, and iShares MSCI Taiwan (EWT)* brought in more than $3 billion combined in April. Fixed-income ETFs were also popular in April. While credit markets have recovered somewhat from the Lehman Brothers' aftermath, yields on both investment-grade and junk bonds remain at historically high levels. During the past month, investors were actively snapping up  iShares iBoxx $ Invest Grade Corp Bond (LQD) and  iShares iBoxx $ High Yield Corp Bond (HYG) in order to capitalize on these attractive yields. Long-run inflationary concerns were also evident in the fund flow data for April, as  iShares Barclays TIPS Bond (TIP) continued to attract assets.

On the flipside, we saw assets fleeing some domestic broad market indexes, including  SPDRs (SPY),  PowerShares QQQ ,  DIAMONDS Trust  (DIA), and  iShares Russell 2000 Index (IWM). Because the SPDRs are a haven for institutional investors moving large sums of money, we wouldn't automatically assume that investors are bearish on the S&P 500. In fact,  iShares S&P 500 Index (IVV), which is more suitable for long-term investors due to its regulatory structure, actually saw net inflows of more than $315 million, ranking it 16 on the inflows list. In our view, the SPDRs' flows likely indicate a mixture of profit taking and institutional investors allocating money toward more opportunistic investments. The table below lists the 10 ETFs that experienced the highest redemptions in April.

Top ETF Outflows in April 2009
	Estimated Net Outflow ($MIL)	AUM ($Mil)	YTD % Change
SPDRs (SPY)	-3,868	60,678	1
Ultra S&P500 ProShares (SSO)	-1,141	2,630	-2
Direxion Daily Financial Bull 3x Shares (FAS)	-685	1,136	-61
SPDR Gold Shares (GLD)	-641	31,353	2
PowerShares QQQ	-520	13,388	18
DIAMONDS Trust, Series 1 (DIA)	-518	6,981	-3
iShares Russell 2000 Index (IWM)	-454	8,475	3
Ultra Financials ProShares (UYG)	-395	2,329	-33
Energy Select Sector SPDR (XLE)	-332	4,277	3
Ultra QQQ ProShares (QLD)	-259	1,169	33

A quick glance at which ETFs investors were buying and selling in April might suggest that investors' risk appetites are returning. One could surmise that investors pulled cash from broad indexes (and funds like  SPDR Gold Shares (GLD)) in favor of higher beta market exposure. Whatever the case may be, we urge investors to take this information for what it is: A simple snapshot of ETF asset flows. Also note that the data tell us nothing in isolation, so be careful when analyzing the data and drawing your own conclusions.

*iShares FTSE/Xinhua China, Vanguard Emerging Markets, and iShares MSCI Taiwan are not listed in the table. Those funds ranked 12, 13, and 17 on the net inflows list for April and brought in about $450 million, $446 million, and $285 million, respectively.

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