Market Maelstrom Shows Investors Prefer ETFs

Volatility has been the order of the day, well, really the order of close to a month for global financial markets. That much is confirmed by the S&P 500's 5.8 percent August tumble, but through a spate of volatility that has seeped into September, investors are showing they prefer ETFs to mutual funds.

According to fund flows from Lipper analyzed by S&P Capital IQ, investors pulled $301 million out of U.S. diversified equity mutual funds in the week ended August 26 and then $770 million the subsequent week. In contrast, investors pulled $5.0 billion out of U.S. diversified equity ETFs in the week ended August 26, only to put $7.8 billion back in the following week ending September 2. In general, ETFs appeared to be the beneficiary of some of the mutual fund withdrawals, said S&P Capital IQ in a note out earlier this week.

Exchange traded products listed in the United States, including exchange traded funds, added just $2.4 billion in new assets last month, according to ETF research firm ETGI.

Still, net U.S. ETF inflows through the first eight months of the year were $127.5 billion and the U.S. ETF industry is now home to $2.03 trillion in combined assets under management.

For example, after $4.3 billion of outflows in the first week, S&P 500 index objective ETFs had net inflows of $7.0 billion during the second week. SPDR S&P 500 ETF (NYSE:SPY) gathered $7.2 billion of fresh money. Meanwhile, S&P 500 index objective mutual funds saw $216 million of outflows during the second week, more than the $53 million of outflows in the first week. Columbia Large Cap Index (NINDX) was one of the funds hit the most as $111 million left its fund in the week ended September 2, notes S&P Capital IQ.

To this point in September, no ETF has added more than $1.03 billion hauled in by the Vanguard S&P 500 ETF (NYSE:VOO). However, fixed income ETFs have been widely embraced by investors this month as eight of September's top 10 asset-gathering ETFs are bond funds. That group includes the iShares 1-3 Year Treasury Bond ETF (NYSE:SHY), SPDR Barclays 1-3 Month T-Bill ETF (NYSE:BIL) and the iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG).

During the two weeks S&P Capital IQ examined, investors pulled over $2.4 billion from taxable fixed income mutual funds, but $1.3 billion and $3.8 billion flooded into U.S. taxable fixed income ETFs during these two weeks. Among the biggest beneficiaries were those ETFs providing exposure to general US Treasuries ($876 million the second week) and high yield bonds ($487 million). HYG added $450 million alone.

The Vanguard Mid-Cap ETF (NYSE:VO) is the other equity-based ETF in addition to VOO that is among this month's top 10 asset-gathering ETFs.