May ETF Fund Flows: Interest Rates Lead The Way

One of the biggest advantages of ETFs over mutual funds is their overall transparency. 

ETF providers continually update portfolio holdings on their websites, which is often information that's hard to find for most traditional mutual funds.

In addition, several independent ETF portals offer the ability to track daily fund flows as an important indicator of investor demand and withdrawal.   According to the latest data from ETF.com, almost $13 billion flowed into ETFs during the month of May, which lifted total ETF industry-wide assets to over $1.8 trillion.

While the U.S. equity markets have continued to trend higher, it appears investors are less inclined to put money to work in domestic stocks.  Instead, the majority of new asset flows in May chased opportunities in both fixed-income and international markets.   

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International equity ETFs gained $6.5 billion in new money last month, with the iShares MSCI Emerging Market ETF EEM leading the pack.  EEM gained $881 million in new assets as countries such as Russia, India, and Taiwan have continued trending higher.   

The recent announcement of monetary stimulus by the European Central Bank could spark additional interest in both developed and emerging market countries this summer as well.  ETF investors may find more value in select overseas countries that have not risen to the same lofty levels as U.S. markets. 

Gains in fixed-income holdings, particularly in Treasury bonds, was another key theme during the month of May.  The iShares 7-10 Year Treasury Bond ETF IEF increased its total asset size by more than $5 billion in new money alone. 

That monumental increase was due in large part to falling interest rates, which helped spur ETF investors back to conventional fixed-income holdings.  Portfolio managers are likely expecting some additional volatility in the equity markets this summer, and are loading up on bonds to balance out the gyrations. 

 It’s also worth noting that inverse funds increased in size as well, which could be another indicator of defensive positioning in anticipation of a June swoon. Only time will tell if 2014 is the year this elusive pullback in stocks ultimately appears.