Commentary

The ETF industry broke through another barrier in September, as industrywide assets under management topped $700 billion, compared with about $670 billion in assets under management at August month-end.

Investors poured roughly $5.4 billion into U.S. ETFs in September, bringing the year-to-date total to approximately $56.3 billion in net new inflows. ETF industry flows have been quite strong so far in 2009, with positive flows in every month except February, when investors yanked roughly $5.5 billion out of ETFs.

Fixed Income Takes the Cake
Among the broad asset classes, taxable-bond ETFs attracted the most new assets in September. Last month taxable-bond ETFs raked in about $3.2 billion in net inflows, bringing total assets under management in taxable-bond ETFs to about $85.2 billion.

The shift into fixed-income ETFs has been an ongoing theme thus far in 2009; year to date the category has brought in about $26.7 billion of new assets, which makes it the most popular ETF category so far in 2009. For some perspective, consider that taxable-bond ETFs attracted approximately $17 billion in all of 2008.

Investors' heightened interest in the bond market--particularly for the shorter end of the yield curve--has resulted in increased product development from various ETF sponsors. Seventeen new fixed-income products have launched this year (with several more filings still in registration with the SEC), as all the major providers are looking to round out their product portfolios.

Aside from hunting for low-duration bond ETFs in an effort to avoid excessive interest-rate risk, it appears that investors are also bracing their portfolios for a potential long-term bout of inflation. After enjoying more than $6.5 billion in net inflows year to date, iShares Barclays TIPS Bond has doubled in size and currently stands at well over $16 billion in assets after closing out 2008 at roughly $8 billion. High-grade corporate bonds have also been in favor; year to date through September month-end, iShares iBoxx $ Investment Grade Corporate Bond has attracted $4.9 billion in new assets and currently has about $13.3 billion in total net assets.

This year we've also seen investors rush into "junk bonds" with hopes of cultivating equitylike returns and generous yields, thanks to the historic widening of yield spreads in recent months. SPDR Barclays Capital High Yield Bond, which has roughly $2.7 billion in total net assets, has experienced more than $1.4 billion in inflows. Similarly, iShares iBoxx $ High Yield Corporate Bond, which has about $4 billion in total net assets, has brought in about $1.5 billion in new assets so far this year.

Commodity ETFs Shine, Despite Concerns over the CFTC's Ongoing Probe
Along with the rush into Treasury Inflation-Protected Securities, investors have also been pouring into commodity ETFs. Strong interest in commodity markets is likely a function of both tactical strategies looking to join in on the popular "reflation" trade and more folks allocating a portion of their portfolios to commodities for the longer-term diversification benefits that this non-correlated asset class can provide.

After seeing more than $1.4 billion flow into the category in September, commodity ETFs' year-to-date total net inflows have reached $21.4 billion. Net inflows thus far in 2009 represent about one third of the category's $63 billion in total net assets, as of Sept. 30, 2009.

Precious-metals ETFs, particularly those that achieve their target exposure by actually storing physical bullion in a vault, have really bolstered asset growth for the category. For instance, SPDR Gold Shares (the world's second-largest ETF at more than $35 billion in total net assets) alone has brought in more than $9.7 billion in 2009. Again, this can be partly attributable to investors' expectations for inflation and/or a weak dollar.

Blistering Rebound in Emerging-Markets Stocks Propels International Stock ETFs
International-stock ETFs were another bright spot for the industry, making up more than $16 billion in net inflows so far in 2009, including the $2.9 billion in September. Strong investor interest in emerging markets has driven growth for international-stock ETFs, which have a total of $170 billion in total net assets invested across about 150 ETFs.

Just two ETFs-- iShares MSCI Emerging Markets and Vanguard Emerging Markets Stock ETF--accounted for about $7 billion (or 44%) of the category's total year-to-date net inflows. Interestingly, VWO, which levies a net annual expense ratio of 0.27% versus 0.73% for EEM, has been steadily gaining ground on its much larger rival. VWO, which saw $1.5 billion in net inflows last month, has seen its total assets grow to more than $14 billion from about $4 billion at the start of the year. Meanwhile, EEM, which saw $680 million in net inflows last month, has grown to $33.7 billion in total assets from approximately $17.5 billion at the beginning of the year. Obviously, the impressive 60%-plus rally in those indexes through the first nine months of the year was also a major factor behind the total net asset growth.

Outflows from SPDRs Cause U.S. Stock ETF Flows to Dip into the Red
Interestingly, the only category to show net redemptions so far in 2009 is U.S. equity, which has experienced more than $30 billion in outflows year to date through September month-end. However, before declaring that ETF investors have thrown in the towel for U.S. stocks, consider that the S&P 500 tracking SPDRs, which at the end of September still had well over $70 billion in assets, has shed more than $30 billion thus far in 2009. Excluding the SPDRs, U.S. stock ETF flows would have actually been flat to slightly up in both September and the year-to-date period.

It's worth noting that SPY is often used by institutional investors as a cash substitute or to "equitize" assets when managing inflows and outflows. As a result, SPY consistently turns over more than 30% of its total assets daily. Considering its massive size and the fact that it is the most heavily traded security on the planet, we think it's worth looking at U.S. stock ETFs both with and without its heavily influential impact. For a better gauge on investor sentiment on the S&P 500, we like to focus more on iShares S&P 500, which has raked in about $1.4 billion year to date and currently has almost $20.5 billion in total net assets.

Leveraged and Inverse ETF Flows Reverse Course
So far this year, leveraged and inverse ETFs have attracted $11.5 billion in net new assets. This controversial category saw net inflows of just over $1 billion in September, and currently it has about $30 billion in total net assets spread across 146 funds that offer leveraged, inverse, and inverse leveraged exposure to various benchmarks. This marks a turn for the group, as we saw $3.4 billion run for the exits in July and August following the now infamous investor notice issued by FINRA.

ETF Provider Highlights
Among the major ETF providers, Vanguard stood out in September with month-over-month total asset growth of 10%. Furthermore, Vanguard's $17.8 billion in year-to-date inflows represents about 23% of the firm's total ETF assets at September month-end. For perspective, iShares' inflows over the same period represented 8% of the firm's total net assets. On the other hand, the outflows experienced by SSgA thus far in 2009 (attributable to SPY) represented approximately 10% of the firm's total ETF assets. Over the past 12 months, total asset growth for the industry leaders--iShares, SSgA, and Vanguard--was 23.5%, negative 4.6%, and 66.0%, respectively.

Also, some may notice that ProShares' asset growth has trailed its net inflows by $7.5 billion over the past year. This is an astounding figure for a firm with just $25 billion in total assets. While many individuals overlooked the impact of negative compounding and volatility drag, FINRA certainly noticed this impressive erosion of wealth.