Exchange traded funds, known by most as ETF’s have been the latest trend in both institutional and retail investing and we have been very strong believers in the fact that ETF’s represent a great asset class to build a portfolio with. And so investors have been sending much of their money into ETF’s, to the tune of several hundred billions of dollars in 2009. Quite impressive don’t you think? So naturally, I would have assumed that most of their funds were going towards commodity funds as we hear so much news about huge funds such as UNG and USO. But in fact, the commodity ETF’s have not been the most popular destination in 2009. It has been fixed income ETF’s!
Why fixed income?
It might sound surprising to many that the most popular category of ETF’s (in terms of cash inflows) has been fixed income but in fact it makes sense. While equity is a major portion of investors portfolios, fixed income is also a major portion and unfortunately has generally been a category seen as “unfriendly” by most investors. Why? Try buying bonds on a major US company. You will be able of course, but you will end up buying a heavy price. There are many reasons behind this. Generally, bonds is a product traded by the millions. Call a broker to buy 10,000$ worth of bonds and he will do 2 things:
-give you a bad quote to compensate for his time!
As well, since bonds are not traded on listed markets, there is little transparency so the brokers do know that it will be difficult for customers to complain about the price they got. Because of that, it becomes very tricky for retail investors to be active in fixed income without getting “screwed”.
The new alternative
So suddenly, ETF funds make it possible for investors to invest in fixed income and get competitive pricing because these funds are big enough to get good prices and be able to shop around for the best prices. And since these funds trade on listed markets, investors have a good idea of what they are buying and if their price is fair.
Here are in order the ETF categories ranked by cash inflows in 2009 according to Credit Suisse:
Please note the last 3 actually saw a net decrease in cash flows.