The flood of money into ETFs continued in March, though not quite as robust as first blush. According to our database, equity funds saw roughly $39.6 billion in new money for the month, while Bond ETFs captured some $9.2 billion, representing increases in overall assets under management of 1.8% and 1.9%, respectively. However, after adjusting for increases in short interest, the “net long” inflows were somewhat lower, at $34.9 billion for equities and $6.7 billion for bonds (Figure 1).
We believe “net long” flows provide better insight into investor sentiment, since some inflows are used to create new short positions. Overall short interest in equity funds ticked up from 6.8% to 6.9% of shares outstanding, but for bond funds increased from 3.3% to 3.8%—still small relative to total shares outstanding, but nonetheless an increase of 14% in shares held on the short side, most likely a reflection of investors’ anticipation of higher interest rates (Figure 2).
|Figure 1: Flows by Asset Class
Standard vs. Net Long, March 2017, in $bns
|Figure 2: Short Interest by Asset Class
as a %-age of Shares Outstanding
|Source: DTCC and ETF Research Center||Source: DTCC, FactSet & ETF Research Center|
One consistent trend across both equity and fixed income markets was investors’ enthusiasm for emerging market assets. In absolute terms emerging market ETFs have a much smaller asset base than their developed market counterparts of course, but they drew in an outsized portion of new money last month. Specifically, only 8.0% of all equity ETF assets were invested in emerging market stocks as of the beginning of March, but these ETFs took in 15.8% of net long flows during the month. As a result, net long emerging market ETF assets grew 3.5% while developed markets increased just 1.5%.
The big winner here was the iShares Core MSCI Emerging Markets ETF (IEMG), which saw total inflows equivalent to about 10% of assets, a big jump in one month for such a large fund. The $27 billion IEMG is now almost as big as the bellwether iShares MSCI Emerging Markets ETF (EEM), which has $30 billion in assets. There’s huge overlap between the two, but for investors looking to choose one we’d go with IEMG, which is more diverse and much cheaper at 14 basis points, compared to a stated expense ratio of 72 basis points for EEM.
The disparity was even more pronounced on the fixed income side. Long money flows for emerging market bond ETFs totaled 8.2% of assets, far outstripping other categories (Figure 3). Here again the biggest beneficiary was an iShares fund, its JP Morgan USD Emerging Markets Bond ETF (EMB), which took in more than half a billion dollars in new money, growing assets to nearly $10 billion.
Corporate bond ETFs—which include both investment grade and “junk” bonds—are an interesting case. The segment actually had positive inflows of about $1.6 billion, or 1.0% of assets under management. However, there was a large increase in short interest, from 4.1% to 5.7%, for a roughly one-third increase in total shares held short! That’s an increase of about $2.6 billion in AUM on the short side, thus “wiping out” the $1.6 billion inflows measured the standard way. The result is therefore equivalent to a small outflow of funds as shown in Figure 3).
|Figure 3: Fixed Income Fund Flows by Category
as a %-age of starting AUM, March 2017
|Source: DTCC and ETF Research Center|
What do you think? Is now a good time to load up on emerging market stocks and bonds?