ETFs Drop 3.2 Percent Amid US, EM Equity Worries

ETFs had a rare drop in value as investors moved away from emerging market and US equities in general, losing 3.2% in total ETF/ETP (exchange traded funds/products) assets, dropping to $3.2 trillion, according to a ETFGI report on Thomson Reuters.

“Concerns about economic uncertainty and unrest in emerging markets, a fear that US stocks are over bought, as well as uncertainty over the impact of Fed tapering caused investors to take net outflows of US$7.6 billion from ETFs/ETPs in January 2014,” says ETFGI managing partner Deborah Fuhr.

ETFs Drop 3.2 Percent Amid US, EM Equity Worries

ETF flows match other fund flows trends

Equity ETFs had $11.8 billion in outflows and commodities had $1.9 billion in outflows; bond ETFs absorbed some of the cash with $2.9 billion in net inflows. This movement from equities to bonds matches the overall trend for January, and cuts against the Great Rotation thesis that some analysts have been pushing since last year. While equity funds have been gaining ground against bonds, it certainly hasn’t been the clear forward march that was expected.

ETFs had been growing so rapidly that Ernst & Young analyst Lisa Kealy estimated that they could surpass hedge funds in total AUM in the next 12 – 18 months. Just as many equity bulls are unfazed by the recent drop in prices, no doubt ETF bulls expect a similar rebound as money flows back into equities. For a product that’s meant to increase exposure to a specific index (most follow S&P Dow Jones indices), matching performance and flows isn’t surprising, either in a bull market or a crash.

ETFs popularity drawing a backlash

Even if ETF inflows return once the market settles down, their increasing popularity is starting to draw criticism from advisers who don’t think retail investors really understand what they are buying, what the tax implications are, and how the risk associated with an ETF is different from the risk of the underlying securities.

“There seems to be a belief in the marketplace that ETFs are superior to open-end funds, and they’re not,” Portfolio Solutions founder Rick Ferri told The CFA Institute. “I wouldn’t touch 95% of the ETFs out there. They have to be interesting enough and low enough in cost to justify taking a position in them.”