ETF Observer - 2014 June

Sell in May?
It looks as though investors may be foregoing their summer vacations.

June saw broad-based gains in global equity markets and $17.4 billion in net new inflows into U.S.-domiciled exchange-traded products, which might be evidence that investors are sitting tight this summer. Instead of going away, ETP flows seem to indicate that investors are ratcheting up their risk exposures. Taxable bond exchange-traded funds registered $8.7 billion of net new inflows in May—the second largest monthly figure in the past three years. Investors demonstrated a preference for riskier fare in this segment last month. Long dated government bond and high yield ETFs were the biggest asset gatherers in the category. Meanwhile bank loan ETFs saw a second consecutive month of net outflows. This marks just the third month of net outflows for bank loan ETFs in the three-plus years that they have existed. In the realm of equities, ETFs benchmarked to European stock bogies had an 11th consecutive month of inflows. ETFs in the diversified emerging markets category notched their second consecutive month of inflows after having hemorrhaged assets through much of 2013. All-in-all it looks as though investors are paying little heed to the old adage “sell in May and go away” as summer gets under way.

In this issue, we feature three recent articles from Morningstar’s passive strategies research team. The first article, written by Michael Rawson, scrutinizes investors’ collective obsession with alpha. He argues that market beta gets short shrift. Given that market exposure does most of the heavy lifting when it comes to producing investment returns, beta should command more respect. Next, Patricia Oey provides an in-depth analysis of upcoming changes to the MSCI Emerging Markets and MSCI Frontier Markets indexes. The graduation of Qatar and the United Arab Emirates from frontier to emerging market status has a number of important implications for index fund investors. In this month’s third and final article, Robert Goldsborough examines the latest developments in the realm of non-transparent actively managed ETPs. SEC approval of non-transparent ETP “technologies” could spur a flood of active ETP launches. But essential questions around the “if” and “when” of any such approvals must first be answered.