Investors fretting over a weaker U.S. dollar and the outlook for inflation have been stuffing cash into exchange-traded funds following commodities, foreign stocks and inflation-protected bonds, industry data show.
"Aside from hunting for low-duration bond ETFs in an effort to avoid excessive interest-rate risk, it appears that investors are also bracing their portfolios for a potential long-term bout of inflation," said John Gabriel, ETF analyst at Morningstar.
He said industrywide ETF assets topped $700 billion last month, with year-to-date inflows, or net buying, of $56.3 billion.
So where is the money going? Into bonds, commodities and international stocks, particularly the emerging-markets subcategory. For the major asset classes, taxable-bond ETFs hauled in the most new money in September, according to Morningstar.
The preference for bond ETFs mirrors the buying trends in mutual funds. Many individual investors sat out the stock-market rally that started in March and have piled into bond funds.
"The shift into fixed-income ETFs has been an ongoing theme thus far in 2009; year to date, the category has brought in about $26.7 billion of new assets, which makes it the most popular ETF category so far in 2009," Mr. Gabriel said. "For some perspective, consider that taxable-bond ETFs attracted approximately $17 billion in all of 2008."
The earliest ETFs tracked stocks, but the bond side of the business is growing. At the end of September, there were 768 U.S.-listed ETFs. Of these, 68 were fixed-income funds, with about $91 billion in total assets, according to research from State Street Global Advisors.
"From their start with a handful of options in the 1990s, ETFs have grown up around a clear value proposition -- low-fee offerings that allow for diversification and/or targeted investment themes," said Nicholas Colas, ConvergEx chief market strategist.
In terms of size, one bond fund that has been roaring up the charts is designed to protect investors from inflation: iShares Barclays TIPS Bond Fund (trading symbol TIP). The ETF, which is indexed to a basket of Treasury Inflation-Protected Securities, has grown to nearly $17 billion.
"After enjoying more than $6.5 billion in net inflows year-to-date, iShares Barclays TIPS Bond has doubled in size and currently stands at well over $16 billion in assets after closing out 2008 at roughly $8 billion," Mr. Gabriel said.
Inflation fears also have pushed investors into ETFs tracking gold and commodities.
Investors can get exposure to gold prices with ETFs such as SPDR Gold Shares, which trades on the NYSE Arca exchange and charges annual fees of 0.4%. This ETF holds more than $37 billion in assets and has been a popular vehicle to trade the precious metal with gold futures over $1,000.
Mr. Gabriel said strong interest in commodities markets is being driven by "tactical strategies looking to join in on the popular 'reflation' trade and more folks allocating a portion of their portfolios to commodities for the longer-term diversification benefits that this non-correlated asset class can provide."
However, some commodities ETFs that invest in futures contracts have run into trouble lately as a result of position limits imposed by the Commodity Futures Trading Commission.
Some of the funds are broad-based and hold several commodities, such as PowerShares DB Commodity Index Tracking Fund. The ETF, with assets of nearly $4 billion, recently expanded the number of commodities it tracks as a result of the CFTC's stepped-up examination of certain ETFs.
The big rally in emerging markets has attracted investors to this volatile sector. Two of the top-selling funds this year are iShares MSCI Emerging Markets Index Fund and Vanguard Emerging Markets ETF.
ETFs targeting individual developing countries such as iShares MSCI Brazil Index Fund have also garnered interest.
"With hopes of increased U.S. and European demand for commodity and other emerging-markets exports bolstered by a good start to the third-quarter earnings season and the latest Chinese trade numbers, investors poured money into emerging markets equity funds during the second week of October," said investment researcher EPFR Global in its latest weekly update.
