Investors poured a record-breaking $191 billion into the U.S. exchange-traded-fund industry in 2012, a 61% increase from 2011 and a 13% rise from the previous record of $169 billion set four years ago.
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Total assets for U.S.-listed ETFs climbed to $1.35 trillion last year, 27% more than one year ago, accounting for 13% of total ETF and mutual fund assets. ETF assets have more than doubled since the end of 2008, driven by strong inflows into U.S. equities, international equities and fixed-income ETFs. Those asset classes attracted $68.96 billion, $52.12 billion and $43.98 billion, respectively, over the past 12 months, according to Index Universe.
BlackRock iShares led the way in total assets, edging out competitors Vanguard and State Street by garnering $61 billion in assets in the U.S. while capturing $85.2 billion worldwide. Vanguard ranked second in the U.S., gathering $53 billion, while State Street placed third, attracting $40 billion. The three biggest firms account for 80% of last year’s total inflows.
Investment strategy changes boosted various asset classes throughout the year; uncertainty in the U.S. fueled investors’ appetite for safety, triggering demand for bond funds.
“Putting aside speculative and narrowly focused ETFs, fixed income was a big sector winner in 2012,” said Oliver Pursche, Gary Goldberg Financial Services President.
Strong performance in fixed-income funds is catching the eyes and ears of investors, and despite the fact that several funds have failed across the industry, this asset class may be on its way to another record year.
“We expect product development to continue and competition to increase,” said Yu-Dee Chang, ACE Investment Strategists Principal and Chief Trader. “We expect the big growth in ETF products to be in the fixed income and active funds space.”
SPDR S&P 500 ETF (NYSE:SPY), the oldest and largest U.S.-listed exchange traded fund, was the top asset-gainer last year, attracting $20.72 billion in 2012 according to Morningstar. The majority of the fund’s flows came in December when the ETF garnered $17.85 billion in net flows.
The iShares Dow Jones U.S. Home Construction Index Fund (NYSE:ITB) was the top performing unleveraged ETF last year, rallying 79.4%. The ETF traded at its highest price in five years as investors looked to take advantage of the recovering housing market. ITB attracted $800.67 million in inflows according to Index Universe.
The second-highest performing unleveraged fund and the top performing country ETF was the MSCI Turkey Investable Market Index Fund (NYSE:TUR), finishing the year up 62%. The emerging market fund rose as Turkey received an investment-grade credit rating from Fitch Ratings following 18 years of junk status. The fund has a 12-month yield of 1.54% and charges 61 basis points in fees and expenses.
PIMCO Total Return ETF (NYSE:BOND) was the most successful new launch of the year, and the second most successful ETF launch in history, falling short of SPDR Gold Shares’ debut. BOND gathered nearly $4 billion in flows during its first year.
But will last year’s top performers continue to outshine the competition?
“We like some of last years’ winners but we also see new opportunities,” said Pursche. “My top picks for next year are ETFs in the food and beverage industry. They’re cheap and positioned to grow at a faster rate. iShares Dow Jones US Consumer Goods (NYSE:IYK) is a top play. The fund’s top holdings are large-cap value and large-cap blend stocks with very strong balance sheets.“
IYK’s top five holdings are Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), Philip Morris International (NYSE:PM), PepsiCo (NYSE:PEP)and Altria Group (NYSE:MO).
Pursche is also closely watching consumer discretionary funds.
“Consumer discretionary funds will benefit from clarity on taxes and a strengthening economy,” said Pursche. “Personal consumption is pretty strong and I expect retail sales to continue to impress. Both of these facts will benefit consumer discretionary funds.”
Consumer Discretionary Select Sector SPDR (NYSE:XLY) is up 2.17% so far this year.
And there’s opportunity outside of the U.S. too. “There is a particularly bullish sentiment on emerging markets ETFs,” said Chang. “We have seen allocation to smaller emerging economies in anticipation that they may outperform the BRICs. When investors believe that the investment and political climates have sufficiently stabilized in the small emerging economies, look for them to outperform.”
iShares MSCI Mexico Investable Market Index ETF (NYSE:EWW), Global X FTSE Colombia 20 ETF (NYSE:GXG) and Market Vectors Indonesia Index ETF (NYSE:IDX) are just a few funds offering investors emerging markets exposure.