ETF Riddle: What do Gold, Japan, Qatar, Bonds and the Sun Have in Common?
U.S. exchange-traded funds attracted some $73 billion in the first half of 2013, a few billion less than last year's record-breaking pace. Not bad in the wake of a June selloff sparked by the Federal Reserve's talk of tapering its bond buying. Fed Chairman Ben Bernanke's little performance contributed to $11 billion in ETF outflows, the worst month since January 2010.
The five statistics below tell the tale of the biggest trends in ETF Land over the past six months -- and what to keep an eye on in the next six.
1. The SPDR Gold Trust has lost half of its assets.
That asset drop is due in part to GLD's year-to-date loss of 26 percent, as well as to the $18.1 billion investors pulled from the fund. The fund outflow is six times that of the ETF with the most outflows for all of 2012, the iShares 1-3 year Treasury Bond ETF (SHY), which had just over $3 billion in outflows.
One gold lining to this cloud: Even with the brutal year GLD is having, it has more than doubled the total return of the Standard & Poor's 500 Index since its 2004 inception. GLD has a 158 percent return since launching; that compares to the S&P 500's 63 percent over the same period.
2. Japan ETFs brought in 17 times as much cash as any other single-country ETF.
ETFs that provide exposure to Japan brought in $13 billion in new money so far this year. That's miles beyond the next big-money draw on the list, ETFs that invest in the U.K., which attracted $700 million.
The flood of money into Japan ETFs was led by the WisdomTree Japan Hedged Equity ETF (DXJ), which not only gives exposure to Japan stocks, but hedges out yen exposure. Investors used ETFs to exploit “Abenomics,” the policy of Japan’s Prime Minister Shinzo Abe to weaken the yen, which boosts Japanese exports. DXJ returned 22 percent in the first half and led all ETFs with $8.1 billion in flows. Additional currency-hedged ETFs have cropped up, including the WisdomTree Japan Hedged SmallCap Equity ETF (DXJS), which launched last Friday.
3. The bond ETF with the most inflows yields 1.7 percent and returned -0.54 percent.
Investors are so spooked about rising interest rates that they are pouring money hand over fist into the Vanguard Short-Term Debt ETF (BSV), an ETF that has a negative total return and a tiny yield. This is because, as the name says, this ETF is loaded with short-term government and corporate debt, and that near-term focus provides relative safety from rising interest rates. BSV led all bond ETF inflows with $3.2 billion in new cash. Overall, short-term-debt ETFs have brought in about $18 billion in new money so far this year.
Even Pimco's Bill Gross wasn't immune to the exodus out of bond ETFs with portfolios maturing in three years or longer. (Actually, the exodus is out of funds with "durations" -- a gauge of the securities' price sensitivity to rate moves -- of three years or longer. For a more detailed definition of duration, you can go here.) Gross's Pimco Total Return Bond ETF (BOND) lost $544 million in June, the second straight month of outflows following a 12-month streak of huge inflows.
Pimco doesn’t need to worry too much when it comes to its bond ETFs, since it also has a very popular low-duration bond ETF, the Pimco Enhanced Short Maturity ETF (MINT). Inflows into that fund more than made up for BOND’s outflow by taking in $667 million in June and $1.4 billion over the year's first half.
4. Four of the top five best-performing ETFs invest in clean energy.
When clean energy ETFs surged at the start of the year, many thought their run would be short-lived and they'd go back to their status as the worst ETF investments known to humankind. Instead, they have owned the ETF leaderboard in the first half. The No. 1 overall top performer was the Guggenheim Solar Energy ETF (TAN), up 51.8 percent on the year -- and still down 89 percent since its inception in 2008. The question for investors and pundits alike: Can clean energy funds keep it going in the second half?
5. Frontier markets outperformed emerging markets by 20 percent.
Frontier markets haven't just been immune to the emerging-markets selloff so far in 2013, they have excelled during it. The iShares Frontier Markets ETF, which includes countries like Kuwait, Qatar and Nigeria, ended the half with a gain of 10.8 percent. That compares with a 10 percent loss for the iShares MSCI Emerging Markets (EEM), which includes countries like China, Brazil and India.
Frontier ETFs showed how their lack of correlation to other markets can really pay off and protect a portfolio. Investors took note, and the class saw a 50 percent increase in assets. If this keeps up, 2013 could be the year that frontier ETFs break out from the shadows of the bigger emerging markets -- which some say aren’t really emerging anymore.