Yield of Dreams

In Times of Uncertainty, Turn to ETFs

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In times of economic uncertainty and turbulent times, investors have historically turned to exchange traded funds. It happened after the tech bubble burst; it happened after 9/11; and it happened in the fourth quarter of 2008. No wonder we're also seeing it now, with the Mideast conflicts, European debt crisis, muni bond concerns, inflationary pressures, Japan and the U.S. debt ceiling debacle.

"In times of uncertainty, ETFs are the vehicle of choice," said Kevin Quigg, global head of the SPDR ETF capital markets group at State Street Global Advisors. SSgA's 2011 Mid Year SPDR ETF Outlook, released today, showed that investors continue to flock to ETFs. During the first six months of this year, $56.3 billion in assets went into ETFs, up 50.9 percent over the first half of 2010. If flows continue at this pace, 2011 will mark the fifth straight year ETF inflows have exceeded $100 billion.

2011 Mid Year ETF Outlook-2

Quigg says investors are drawn to ETFs in times of trouble because they like the liquidity and transparency. The liquidity gives people comfort because they know at what price they sold their ETF 10 minutes ago, he says. With the transparency, investors know what the underlying constituents are.

Some other key points that came out of the report, that are forward-looking:

  1. ETFs that track the non-U.S. equity and fixed income markets will continue to see traction.
  2. Investors will continue to look toward income-oriented investments, such as dividend-paying ETFs, high bonds or convertible bonds.
  3. With inflationary pressures, investors will look inflation-protected investments and lower duration bonds.
  4. Investors will continue to look for investments with low or negative correlations.
  5. Actively managed ETFs will start to get some traction as a way to get alpha.

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What's Yield of Dreams?

Casting a gimlet-eye on asset management issues.

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