If you want some evidence of how the global asset markets are changing in tone, just look at how exchange-traded funds (ETFs) across the world received record inflows from global investors in 2012 amid strong rallies in equities.
Strong inflows
According to Morningstar, $191 billion flowed into these funds during the year, which exceeded the record $169 billion in inflows during 2008. Investor behavior was different in 2012, as they put put money into a wide range of ETFS – including those granting exposure to stocks in specific industries, international equities and fixed-income securities. This broader allocation served as a contrast to the strong inflows that went into stocks in 2008.
Data provided by ETF Trends indicates that that in 2012, the total assets that these funds had under management surged 27 percent from the year before to reach $1.3 trillion. Dave Nadig, who is the director of research for IndexUniverse, wrote in the New York Daily News that 2012 was "the best year ETFs ever had."
Morningstar reports that after these robust inflows, ETFs are responsible for 13 percent of the total assets held by these securities and also mutual funds, which includes money market funds. The assets that ETFs have under management have surged by more than 100 percent since the end of 2008. One major contributor to this rally is the robust inflows enjoyed by fixed-income ETFs.
Surging stocks
ETF Trends reports the surging inflows into ETFs largely reflects the strong appreciation in global equities. The benchmark S&P 500 Index had a great year, surging 13.4 percent. Global stocks had even more robust performance, with the MSCI All-Country World Index spiking 16.9 percent during 2012. The Dow Jones Industrial Average had a strong year, rallying 7.3 percent.
The New York Daily News reports that while the benchmark S&P 500 spiked in 2012, its ETF – the SPDR S&P 500 – received $15.77 billion in inflows, which was more than 8 percent of the total assets going into these funds.
"People are getting back into the stock market," Olly Ludwig, managing editor of IndexUniverse.com, told the news source. "Equities are clearly coming back into favor."
Changing market trends
The media outlet reports that ETFs are gaining increasing favor among investors, as these market participants are drawn in by their benefits. These securities are different from mutual funds in that they are not actively managed. Since they do not actively pick out assets in an effort to beat the broader markets, they generally have lower fees. There are some ETFs that are actively managed, but they are rare.
"There are exceptions to the rule, but on average most ETFs are extremely inexpensive," Nadig told the news source.
In addition, ETFs offer greater flexibility to investors, since they are traded throughout the day. If you want to trade these securities, you have the ability to buy and short them like regular stocks. Mutual funds are different in that they are priced at the end of every trading session.
ETFs also provide investors with tax benefits, as they do not distribute capital gains frequently. Nading told the media outlet that the tax benefits became even more appealing late in 2012, as investors grew more concerned about what U.S. fiscal policy would look like after the end of the year.
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