Record ETF inflows fuel US equity rally

We are hearing some trader chatter that the U.S. equity markets are decoupling a bit from Europe, and are now benefitting from their crisis. Whereas in the past, any negative euro-zone headlines would tank our domestic markets, we’re now beginning to see a flight of capital from Europe seek safety in the U.S. Now with the heightened risks of bank deposit theft as witnessed in Cyprus, European investors are getting out of dodge and putting their money to work here in the U.S.

In the article below, BlackRock data reported US equity-linked ETFs attracted inflows of $37.3bn in the first quarter, a jump of 80 per cent compared with the same period in 2012, fuelling a 10 per cent gain for the S&P 500 since the start of the year.

Record ETF inflows fuel US equity rally

By Chris Flood in London

Record inflows to exchange traded funds supported the surge last week by the S&P 500 index to an all-time high, with growing numbers of professional and retail investors using ETFs to tap into the US stock market rally.

Investors ploughed $70.1bn into ETFs and products worldwide in the first three months of 2013, according to data from BlackRock, up 7 per cent on the same period last year, the previous best quarter on record.

“More cash is coming off the sidelines and being put to work. Record inflows for ETFs reflect investors’ renewed confidence in the outlook for developed equity markets,” said Russ Koesterich, global chief investment strategist at BlackRock, the world’s largest fund manager.

US equity-linked ETFs attracted inflows of $37.3bn in the first quarter, a jump of 80 per cent compared with the same period in 2012, fuelling a 10 per cent gain for the S&P 500 since the start of the year.

“Investors recognise that the US fundamentals are generally favourable, given strong corporate earnings and reasonable equity valuations,” said Mr Koesterich.

He added that the data did not point to the widely predicted “great rotation” from bonds into equities as fixed-income ETF inflows had remained robust, above the $10bn level for an eighth consecutive quarter.

“However, we are seeing a rotation within fixed- income ETFs with more investors preparing themselves for a rise in US interest rates, leading to outflows from Treasury-linked ETFs and into floating rate funds,” said Mr Koesterich.

Assets under management in ETFs, which track market indices, have doubled to $2tn globally over the past four years, with the leading ETF managers openly fighting a “price war” to win market share.

Charles Schwab, the US financial services provider, set a new industry benchmark for low fees after reducing management charges across its entire ETF range last year, undercutting Vanguard, which was previously regarded as the cheapest provider.

BlackRock launched a new low-cost ETF range in October and Vanguard has responded with further fee cuts in 2013. Managers are also competing aggressively to attract financial advisers and retail investors with eye-catching offers of commission-free ETF trading.

In March, BlackRock and Fidelity Investments, the global financial services provider announced a strategic alliance aimed at boosting US retail investor interest. Fidelity doubled to 65 the number of commission-free BlackRock iShares ETFs available on its platform to its 10m US customers.

Bill Katz, an analyst at Citi, said ETFs were becoming mainstream investment vehicles as their adoption by retail investors increased.

In February, Schwab also extended its offer of commission-free trading from its own-branded range to include 105 ETFs from five other providers.

TD Ameritrade, one of the largest US retail brokers which launched commission-free ETF trading in 2010, said in March that its retail client ETF holdings had more than doubled over the past five years.

“In turn, should equities gain further traction and a secular bull market materialise, we believe ETFs may garner a large share of investor inflows ,” said Mr Katz.

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