ETF Expert

The exchange-traded fund industry certainly has reason to cheer. With nearly 820 ETFs and close to 3/4 of $1 trillion under management, the numbers speak volumes about viability and desirability.

Yet, with roughly $90 billion net new dollars coming in 2009, U.S. stock ETFs actually LOST -$26 billion of assets under management. And that’s on top of the fact that U.S. stock ETFs effectively appreciated 20% YTD.

What makes the exodus from U.S. stock ETFs particularly impressive… if that’s even the right word to describe it… is the inflow strength into 4 other areas: (1) fixed income, (2) commodities, (3) international equities and (4) inverse (short) funds. Let me address these areas from a macro-perspective.

Investors socked approx 44% of the total ETF inflow into fixed income ETFs. This certainly doesn’t suggest that the investing public is unduly bullish; otherwise, one might expect to see a far greater allocation to U.S. and foreign stocks.

Taken a step further, another 14% had been placed into inverse (short) U.S. stock funds. Whether that growth is due to hedging (protection) or outright bearishness, few could look at the fund flow numbers without seeing a bevy of concerned citizens.

Indeed, another 15% of 2009 ETF growth is attributable to Gold (GLD) alone. Yellow metal euphoria? Bubble? Or simply an indication that investors are exceptionally wary of the weak U.S. economy and weaker U.S. dollar?

I am not suggesting that caution exists clear across the board. In fact, 33% of ETF fund inflows are attributable to international equities. And, there should be little surprise at how much of that has gone to emerging market stocks.

When I look at the entire picture, however, I see a definitive pattern taking shape; that is, investors are not yet convinced that developed nations like the U.S., Japan and “Old Europe” are on a sustainable growth path. That is why they are pouring copious amounts of money into fixed income ETFs.

Investors are convinced, however, that the developing world is the place to seek capital appreciation. They’re also convinced that the weak dollar is a long-term trend, and are seeking safety in gold as well as other commodities.

So the question at this point is, “Are investors benefiting from their thinking?” A contrarian might look at the recent employment data for the U.S., and the record lows for the U.S. dollar, and decide to shift more towards American equities. A contrarian might leave fixed income, smelling the imminent rise in rates. And a contrarian might be inclined to take some profits on gains in the emerging market scene.

That said, I don’t think we’re there. With U.S. small businesses still struggling to get credit… with U.S. consumers still minding their spending habits… the Fed is unlikely to move quickly. In fact, it’s likely to move too slowly, as the Federal Reserve has a long history of being “behind the curve.”

In other words, it’s still the “dollar carry trade” that will boost domestic and foreign stock prices. And the dollar will likely remain weak for a minimum of 3-4 months longer.

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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