2012 Flows Off to Great Start for ETFs

The global exchange-traded funds industry is off to its best start in history, posting record inflows of more than $100 billion during the first half of 2012, a 16% increase from one year ago.

ETF total global assets climbed to $1.68 trillion with U.S.-listed ETFs accounting for $1.18 trillion, or 70% of the market share.

Among the industry’s top performers were fixed-income ETFs, attracting net inflows for the 18th month in a row through June. According to the ETF Industry Association, the sector more than doubled its cash inflow compared to one year ago, totaling $4.8 billion last month and bringing the year-to-date total to $35.1 billion.

The surge in demand for bond funds made up 41% of all global inflows during the first two quarters of 2012.

“First quarter was risk on and now it’s risk off,” said Michael Krause, AltaVista Research President.  “It’s very much macro worry that’s driving the investments and that’s why we’re seeing significant inflows into fixed income.  Fear in the market is reflected in this play.”

But bond funds didn’t attract the single largest number of assets over the first six months of the year. According to Index Universe, the Vanguard MSCI Emerging Markets (NYSE:VWO) got the biggest boost, posting inflows of $7.52 billion while closing the first two quarters up 4.55%. The fund was also last month’s largest gainer of assets with inflows of $1.0 billion.

VWO is a market-cap weighted fund which holds 876 stocks issued by companies located in emerging markets.

The iShares Dow Jones U.S. Home Construction Index Fund (NYSE:ITB) was the best-performing ETF in the first half of 2012, getting a boost from the slowly recovering housing market. The housing fund, which owns homebuilders like Toll Brothers (NYSE:TOL) and Lennar Corp. (NYSE:LEN) rallied to its highest level since 2008, closing the first half of the year up 41.4%.

More than 120 new exchange-traded funds hit the market during the January through June time frame, cumulating assets of about $3 billion. Of the industry’s newest additions, PIMCO Total Return Exchange-Traded Fund (NYSE:BOND) attracted $1.7 billion in new money since its March debut, landing the ETF among this year’s most successful launches.

BOND, which originally traded under the ticker TRXT, is the ETF version of PIMCO’s Total Return mutual fund, offering investors exposure to corporate debt and Treasuries.

Investors fled from iShares MSCI EAFE (NYSE:EFA) and iShares MSCI Brazil (NYSE:EWZ) as each ETF posted negative $2.88 billion and negative $1.49 billion in flows.  IShares MSCI EAFE  holds many multinational firms with significant exposure to global growth while iShares MSCI Brazil is a direct play on the overall performance of the Brazilian equities market as measured by its underlying index.

EFA closed the first 6 months of 2012 up 0.87% while EWZ posted a loss of nearly 10%.

The total number of U.S. listed exchange-traded funds rose to 1,476 as of June 30th, up 15% from the year-ago second quarter.