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First Half 2011 Performance Report

First Half 2011 ReportInvestors Take Stock in Exchange-Traded Funds

After a strong first four months of 2011, exchange-traded funds and mutual funds both saw cash flow out of products that invest long-term in stocks at the end of the second quarter.

But, overall, the long-term stock funds adhering to the exchange-traded format were more attractive in the first half of the year than their mutual fund counterparts.

All told, $55.8 billion flowed into all types of exchange-traded funds, according to the electronically maintained records of the National Stock Exchange, published formally on July 5. That boosted assets under management to $1.099 trillion, from $1.043 trillion, a gain of 5.3%.

"Flows into ETFs are significant," said Deborah Fuhr, managing director and global head of ETF research and implementation strategy at BlackRock. "They are higher this year than at the same time last year," as investors use the funds in more ways to adjust to the "many unexpected political, economic, weather and other news" events of the first six months of the year.

By contrast, $108.9 billion flowed in to mutual funds in the first half, through June 22. That was a gain of less than 1% on the $12.4 trillion of assets already under management by mutual fund companies.

Moreover, that money is not actively managed by the investors.

"That $108 billion, a lot of that is what I would call the 'set it and forget it' money," said Jeff Tjornehoj, senior research analyst at Lipper, which tracks all kinds of funds.

"People with 401k plans, they make their allocation and away we go. It's a lot more dependable flows, than on the ETF side."

Soft Spot

The dynamics of the two different types of funds-those that can be traded within a session on exchanges and those that only get priced at the end of the day-were in clear contrast in the first half of this year. Particularly after both exchange-traded funds and mutual funds that invested long-term in corporate stocks hit what Tom Roseen, head of research services at Lipper, called a "soft spot" in the U.S. economy in May and June.

Mutual funds investing long-term in stocks pulled in $41.4 billion in the first four months of 2011. But they lost 58% of that gain in May and June, according to Investment Company Institute data. Through June 22, long-term equity funds that priced their shares at the end of each trading day pulled in $17.3 billion all told in the first half of the year.

By comparison, exchange-traded funds that put assets into U.S. stocks for the long haul were up $20.5 billion. Those that invested in international equities were up $13.1 billion.

Totaling it up, exchange-traded funds got 66.0% of all new assets investing in stocks long-term, while mutual funds got only 34.0%.

"If you can pull the trigger, you likely will," Tjornehoj said. "When you have to go through a hundred steps and wait until the end of the day to find out your price, it's much less onerous to trade ETFs. So that's where a lot of the active investors out there have largely shifted their money to, to ETFs from mutual funds."


For exchange-traded funds, long-term equities are by far the biggest category of investment being managed. Fixed-income funds only picked up $18.2 billion. Commodity-based funds saw $1.6 billion walk out.

Altogether, 758 ETFs had net inflows in the first half. Only 296 had net outflows.

The biggest gainers, by far, were the exchange-traded funds run by Vanguard Group and BlackRock. Vanguard picked up $20.9 billion in the first half. BlackRock picked up $12.0 billion.

By contrast, State Street Global Advisors, which kicked off the exchange-traded approach to funds with its SPDR funds, actually was down $61 million. Merrill HOLDRs also were down, by $161 million.

In fact, SSgA's flagship fund, the SPDR S&P 500, saw $9.6 billion flow out in the quarter. Tjornehoj said that was not so remarkable, given that it's the largest fund out there, with $92.1 billion still under management at the end of June.

That is more than twice as much as any of BlackRock's iShares exchange-traded fund. And nearly four times as much as BlackRock's S&P 500 fund.

SSgA also was noteworthy for the value of its trading. The notional volume of shares traded by SSgA was $4.2 trillion in the first half, almost twice that of next most active, BlackRock, at $2.45 trillion. Proshares is third at $575 billion, by the NSX statistics.

"It's going to look like things are a bit unraveled, but it's just par for the course," for SSgA, Tjornehoj said. The SPDR S&P 500 was "one of the worst outflow victims" in the first half of the year, he said, but "people are enchanted by a lot of the new products out there in the ETF space."

Investors have been concerned about a slowdown in the recovery of national economies around the world, the ongoing bailout of Greece's finances, sovereign debt and the end of the Federal Reserve's "quantitative easing" program of paying off intermediate and long-term U.S. Treasury bonds, Fuhr said.

In particular, funds based on commodities and futures have been gaining adherents, she said. SSgA's gold fund, for instance, was up $7.3 billion. Vanguard's emerging markets fund was up $7.0 billion.

That flies somewhat in the face of mutual fund trends for the first half of the year. Emerging market mutual funds in the U.S. and Europe captured $105 billion of net inflows in 2010, according to Jag Alexeyev, head of global research at Strategic Insight, a consultancy. This year, such funds pulled in just $6 billion. Funds dedicated to Asia have seen $10 billion of net redemptions this year.

This is making Asian markets less liquid, Alexeyev said. MME