US Investors Move Into Bond Funds
Monday, August 16, 2010

Inflows into bond funds in the US doubled in July compared to June as investors pulled money out of equity-based mutual funds, according to investment research firm Morningstar.

The firm reported that, almost universally, outflows increased for equity and balanced funds, and inflows rose for bond, alternative, and commodity funds. US ETFs registered total net inflows of USD6.8 bn in July, marking the sixth consecutive month of positive asset flows. Total ETF assets are up 6% since the start of the year and 29% over the trailing 12 months.

Bond funds had another strong month of inflows, with investors adding USD22.3bn to taxable bond funds and USD3.9bn to municipal bond funds, approximately double the inflows municipal bond funds saw in June.

Nearly USD12.4 bn exited domestic equity funds in July, but international stock funds saw less severe outflows of USD565m. Flows into emerging markets equity funds offset redemptions from broader foreign stock funds. Emerging markets equity funds had roughly USD161.4bn in total assets as of the end of July, up nearly 41% over the trailing 12 months.

Emerging markets bond fund assets more than doubled to USD30.8bn over the last year after taking in more than USD1.2bn in July. A significant portion of these flows were allocated to local currency emerging markets bond funds, led by PIMCO Emerging Local Bond Fund with inflows of nearly USD3.6bn over the trailing 12 months.

PIMCO and Vanguard led all fund families in terms of total inflows in July, taking in USD5.9bn and USD4.9bn, respectively. American funds continued to see significant outflows with another USD4.6bn in redemptions in July.

Emerging markets ETFs saw inflows of USD4.6bn, the most popular ETF asset class in July. Vanguard Emerging Markets Stock VWO was the top asset gatherer within the international stock asset class as well as the overall US ETF universe, with USD2.3bn in net inflows in July. Investors also expressed a renewed interest in single-country ETFs to gain precise international exposure while avoiding struggling Eastern European countries.

Commodity ETFs saw net outflows in July for the first month since February. Although iShares COMEX Gold Trust IAU gathered assets of USD209 million during the month, the asset class saw redemptions of USD1.8 billion, led by SPDR Gold Shares GLD with USD1.4 billion in outflows.

Fixed-income ETFs remained popular in July, but investors favored the short end of the yield curve to the longer end. ETFs in the long government and long-term bond Morningstar categories saw combined total net inflows of USD1.1 billion, while short government and short-term bond ETFs experienced outflows of USD446m.

US stock ETFs saw outflows of USD91 million in July, as inflows into small-cap funds were not enough to offset outflows from large-cap funds. Investors added USD2.3 billion to the iShares Russell 2000 Index IWM, bolstering ETFs in the small-blend category, whereas redemptions from SPDR S&P 500 SPY drove outflows from large-cap US stock ETFs.