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Money Suddenly Floods Into Stock ETFs. Will It Stick?


And you thought the U.S. stocks were out of favor.

Then came October.

While $20.4 billion got pulled out of mutual funds that invest long-term in U.S. stocks, money was flooding into exchange-traded funds that invested in U.S. stocks.

In one month, the total market for U.S. ETFs jumped $109 billion or 11 percent, to $1.1 trillion, according to statistics kept by the National Stock Exchange.

By the account of BlackRock, the biggest marketer of exchange-traded funds, October was "the best asset collection month of 2011 so far.''

Roughly $26.5 billion flowed into exchange-traded products, by its count, with $21.3 billion of that being into stock funds. That reversed two months of outflows.

Bond funds kept up its perfect record for 2011, taking in $4.6 billion.

But look at the overall impact. Assets under management for exchange-traded funds increased by $150 billion, all told, BlackRock noted in its monthly depiction of the market "landscape."

The $26.5 billion of new funds were backed by an additional $123 billion of value gained by "positive market" movement and favorable exchange rate movement, toward the dollar.

But the speed of the movement into equity funds, particularly those based on U.S. stocks, was surprising.

"The interesting thing about October is that it started off looking a lot like September and August, where investors were really still very much on the sidelines," said Kevin Feldman, managing director for iShares at BlackRock. "There was a lot of activity happening on the fixed-income side, a little bit on the commodity side, but not too much in equity."

Then came the Angela Merkel-led appearance of a resolution of the European debt crisis and the seeming salvation of the euro. And investors rushed into ... U.S. stocks and funds.

"As the communication started to come out of Europe on possible solutions to the sovereign debt crisis there, you started to see just a pretty dramatic flow into the equity side of ETFs,'' Feldman said.

Historically, the thunder is not that unusual for this time of year, though, said Ben Fulton, managing director and head of global ETFs for Invesco PowerShares.

"This year is kind of a classic market,'' he said. "The classic market was always you sell in May and go away and come back in November. And you saw that almost to the week this year.''

The second half of October was "when you saw big flows,'' he said. And investors were seeking a "better beta." Basically, a low-risk way of capitalizing on the long-term value of stocks.

For PowerShares, this meant an influx into its Standard & Poor's 500 Low Volatility Portfolio. That fund invests in the 100 stocks in the S&P 500 that have the least up-and-down movement over the last 12 months.

BlackRock, Invesco and State Street Global Advisors all saw a "movement towards income," in the process.

This meant not just continued investment in bond funds, which are based on the yields and prospects of fixed-payout instruments, but in exchange-traded funds that pay dividends.

One such beneficiary was State Street's SPDR Standard & Poor's Dividend exchange-traded fund. This is a fund which is designed to closely match the returns and characteristics of the S&P High Yield Dividend Aristocrats Index. This is an index that tries to reflect the performance of blue-chip companies in the S&P 500 that have increased dividends every year for at least 25 years.

Also gaining assets was the SPDR S&P Emerging Markets Dividend ETF. That fund tries to match the price and yield performance of the S&P Emerging Markets Dividend Opportunities Index, which in turn tracks dividend-paying securities of publicly traded companies in emerging markets.

The assets in that fund are denominated in dollars, noted Kevin Quigg, the global head of strategy and consulting for State Street's SPDR ETF business.

Which means they gained favor, as investors moved toward investments denominated in dollars and away from those denominated in euros. This, given the uncertainty of the future of the euro should, say, Greece fail to adhere to the austerity measures underpinning Europe's debt resolution deal or Italy succumb to the weight of its debts.

Most notable, perhaps, is the fact that as investors moved from the euro back to the dollar and from other investments back into funds based on U.S. stocks, nearly no one noticed.

"The amazing thing is it happened and it didn't create a lot of indirect noise,'' said Invesco's Fulton.

That's because ETFs are distinct from mutual funds. If money was flowing back into mutual funds, Fulton noted, a fund's portfolio manager would have to take the money that came in and bid up the price of stocks.