Call it the end of an era—albeit a short one. In the dark days following the 2008 financial crisis, investors grabbed hold of two important staples to try and stay afloat: bonds and emerging market equities. But over the summer, investors have been showing themselves more willing to toss aside these post-crisis security blankets as economic fundamentals improve in the U.S. and as the Fed sends signals that it’s prepared to pull back on its historic stimulus efforts. What all this means for markets is becoming clearer as the summer progresses. Last week’s report from BlackRock on quarterly inflows and outflows from exchange-traded products (ETPs) contains a few important signposts for investors trying to figure out where to go next. Here are the four main ones.
Investors are heading out of emerging markets
A slowdown in China, fears of volatility and tail events—these are just a couple of the risks that have investors shifting their money out of emerging markets after years of pouring money into these burgeoning regions. During the second quarter of 2013, it was an uphill battle for emerging market ETPs as investors pulled money out for a fifth straight month—US$12.2 billion, to be precise.
Bye-bye bonds
Rising interest rates make bonds a pretty risky proposition right now, and investors have been pulling out of bond funds in droves. This isn’t big news for plan sponsors—but it’s part of this shifting post-2008 investment landscape. Although fixed income ETPs brought in $6.2 billion during the quarter, it was the slowest rate of growth in years as inflation-protected bond ETPs bore the brunt of the impact with record outflows of $3.4 billion. Short-term bonds drew a record number of investors, however, as investors sought to hide in products that aren’t as likely to be hit by rate hikes. According to BlackRock, flows into short maturity bond funds (three years and less) hit $13.6 billion as longer-term bond ETPs had outflows of $7.4 billion.
Hello developed markets
As investors shed bonds and emerging markets, money flowed into one neglected area post-2008—developed markets. According to BlackRock, investors poured US$56.4 billion into developed market equity ETPs, led by funds focused on North America. Japan also made a solid showing, with Japanese funds drawing a record $18 billion during the quarter—investors clearly have high hopes for Abenomics.
Hunger for income
And, again, no big surprise, dividend-focused ETPs flourished during the quarter as an aging population retires and investors get hungry for—you guessed it—income. According to BlackRock, dividend ETPs drew $87 billion in assets, accounting for 5.7% of total global equity ETP assets. The number of dividend ETPs has also grown exponentially—up 75% since 2010, outpacing growth in fixed income ETPs and the total ETP market.