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ETF Specialist

ETF Investors Fret Over Inflation, Weak Greenback

ETF fund flow data show investors are still worried about the soundness of the U.S. economy.

Many of the same investor concerns--inflation and a weak greenback--that affected September ETF flows were prevalent once again in October. Still, ETFs continued to attract assets in October; overall ETFs saw slightly more than $8 billion in net inflows for the month, bringing the year-to-date total net inflows to more than $63.9 billion. Industry-wide AUM as of Oct. 31 was $699.15 billion, down slightly from the previous month thanks to market performance.

Fixed Income Posts Another Strong Month of Inflows
Led by the usual suspects, taxable-bond ETFs saw roughly $2.7 billion in net inflows for the month. Treasury Inflation-Protected Securities (TIPS) continued to be a favorite among investors to hedge against inflation, as  iShares Barclays TIPS Bond (TIP) took in nearly $668 million in net new assets in October and about $7.2 billion year to date. (At the end of October, the fund had $17.2 billion in total assets under management.)

Similar to last month, investors exercised caution with respect to potential interest-rate hikes by flocking to short duration bond ETFs. Leading the way on this front were  iShares Barclays 1-3 Year Credit Bond (CSJ) and  Vanguard Short-Term Bond (BSV), which attracted $557 million and $338 million in net new assets in October, respectively.

Long-term fears of a weak greenback also remained at the forefront of investors' minds. International bond ETFs had a strong month, in terms of gathering assets. After amassing $299 million in new assets in October, iShares JPMorgan USD Emerging Markets Bond (EMB) now has $845 million in total assets under management.  SPDR DB International Government Inflation-Protected Bond (WIP), SPDR Barclays Capital Short-Term Treasury Bond (BWZ),  SPDR Barclays Capital International Treasury Bond (BWX),  PowerShares Emerging Markets Sovereign Debt (PCY), iShares S&P/Citi 1-3 Yr International Treasury Bond (ISHG), and  iShares S&P/Citi International Treasury Bond (IGOV) chipped in another $435 million combined.

  Oct. 2009 YTD 2009 2008 U.S. Stock -3,844 -34,609 111,283 International Stock 6,585 22,976 13,108 Balanced 49 224 57 Taxable Bond 2,665 29,340 17,000 Municipal Bond 280 2,897 1,582 Alternative 1,718 21,068 876 Commodities 567 21,976 12,764 Total 8,020 63,873 156,670

 
Domestic-Equity ETFs See Net Redemptions Again in October
For the second consecutive month, U.S. stock asset class was the only asset class to see net redemptions in October, as the group saw approximately $3.8 billion in net outflows. Topping the list was the S&P 500-tracking  SPDRs (SPY), which experienced more than $2 billion in net outflows in October and has shed $33 billion in assets year to date.

It appears that some investors were looking to lock in profits on their broad small-cap holdings following the group's strong outperformance throughout the market's recent rally. Many are starting to question the sustainability of the trajectory that higher-beta names have enjoyed over the past several months. As such,  iShares Russell 2000 Index (IWM) had more than $1 billion head for the exits in October, after bringing in $2.2 billion in net new assets in the three months from July to September.

Commodity ETFs Cool Down in October, but Still See Net Inflows
ETFs offering exposure to commodities or commodity-based strategies saw net inflows of about $567 million in October after attracting more than $1.4 billion in September. Back to claim the top spot was  United States Natural Gas (UNG) with roughly $285 million in inflows last month.  SPDR Gold Shares (GLD) was right on its heels as investors poured more than $284.9 million into the fund. Other physical gold ETFs such as  iShares COMEX Gold Trust (IAU) and ETFS Physical Swiss Gold Shares (SGOL) brought in $173.4 million and $94 million last month, respectively. All told, investors poured $552 million into gold bullion ETFs in October. Investors were fleeing crude oil last month, as the top four funds on the category's outflows list were all linked to "black gold."  United States Oil (USO) shed the most assets with roughly $606 million heading for the exits last month. Next up were Ultra DJ-AIG Crude Oil ProShares (UCO),  iPath S&P GSCI Crude Oil Total Return Index ETN , and United States 12 Month Oil (USL), which saw $213 million, $42 million, and $28 million in net outflows for the month.

Currency ETFs Heating Up
The gloom-and-doom crowd has come out in full force to make its media rounds and opine about the death of the greenback. Amid the daily headlines touting the weakness of the U.S. dollar, investors poured nearly $550 million into currency ETFs, or nearly 50% of the category's $1.18 billion in total year-to-date inflows. Interestingly, there were some contrarian ETF investors who piled into PowerShares DB US Dollar Index Bullish (UUP). That ETF saw $231 million in net inflows last month, equivalent to about one third of the fund's total AUM. In fact, the unexpected surge in interest for this niche ETF product even led the fund to halt trading temporarily on Nov. 5. (The fund has filed an S-3 with the SEC to register an additional 100 million shares of the fund, which we expect to be approved in relatively short order.) If the dollar's prospects are so bleak, then why is there such interest in UUP? While the dollar may face obstacles over the long haul, we'd venture to guess that these investors are betting on another potential stampede into the dollar if we see another leg down in the financial sector. This, of course, is what we witnessed in 2008 when the credit crisis gained steam and investors scrambled for a "safe haven" to park their assets.

As expected, currencies of resource-rich economies fared well in October;  CurrencyShares Australian Dollar Trust (FXA) and  CurrencyShares Canadian Dollar Trust (FXC) saw net inflows of $121 million and $74 million, respectively.

Leveraged ETFs Experienced Net Inflows, Led by ETFs Offering Inverse Exposures
Year to date, leveraged and inverse ETFs have attracted roughly $12.7 billion in net new assets. (ETFs offering leveraged long exposure have seen outflows of $6.1 billion, while ETFs offering inverse and leveraged inverse exposure have seen $18.8 billion in net inflows.) This controversial category saw net inflows of approximately $1.2 billion in October, and it currently has about $31.5 billion in assets under management spread across 146 funds that offer leveraged, inverse, and inverse leveraged exposure to various benchmarks.

Similar to the trends witnessed throughout the year, the October flows were led by the funds that offer daily "short" to their respective benchmarks.  Short S&P 500 ProShares (SH) and  UltraShort S&P 500 ProShares (SDS) had combined net inflows of nearly $350 million last month, a signal that some feel that the market's rally has run its course. Investors were also betting against long-term Treasuries and commercial real estate, as  UltraShort 20+ Year Treasury ProShares (TBT) and  UltraShort Real Estate ProShares (SRS) saw $157 million and $80 million in net inflows, respectively.

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