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Q1 ETF Asset Report: Developed Markets Win, High-Yield Loses

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The markets were more tensed than relaxed in the first quarter of 2018. Increasing inflationary expectations and rising rate fears pushed up bond yields and spurred equity sell-offs in late January and early February. Then, Trump-induced trade fear (thanks to his announcement of import tariffs) and a tech rout in March did the rest of the damage (read: 5 Reason Why FANG ETFs Lost Their Charm in March).

The S&P 500’s total market-cap loss is now over $2 trillion since late January. The shedding also caused an erosion of about 40% of market cap gains in the S&P during Trump bump.

Let’s see how investors reacted to this situation and where they parked their money in Q1. The data are as of etf.com (as of March 27, 2018).

Developed Market Tops With Low Fee Products

Developed international markets stayed steady and brushed away all selloff fears. iShares Core MSCI EAFE ETF (IEFA - Free Report) tracing Europe, Australia and Far East was the topper with about $14.6 billion inflows while Vanguard FTSE Developed Markets ETF (VEA - Free Report) raked in about $3.12 billion.

Notably, despite targeting the EAFE market, iShares MSCI EAFE ETF (EFA - Free Report) lost about $6.19 billion in assets. This could be because of expense ratio differentials and EFA charges (32 bps in fees) much higher than IEFA (8 bps in fees) and VEA (7 bps in fees).

Emerging Market Comes Second

Since the greenback remained subdued in the first quarter as evident from the 1.7% decline in PowerShares DB US Dollar Bullish ETF (UUP - Free Report) , emerging market investments brightened. Apart from this, the fundamentals are pretty pro-growth in emerging markets at the current level unlike in 2013 (famous for taper-tantrum). iShares Core MSCI Emerging Markets ETF (IEMG - Free Report) and iShares MSCI Emerging Markets ETF (EEM - Free Report) hauled in about $6.13 and $2.60 billion in assets, respectively (read: What Lies Ahead for Emerging Market ETFs?).

S&P 500 Makes to the Winning List

Thanks to the economic well-being in the United States, Trump’s pro-growth policies (barring recent trade tensions) and upbeat earnings, the S&P 500 too hauled in considerable assets. This trend benefited the S&P 500-based ETFs like Vanguard S&P 500 ETF (VOO - Free Report) . The fund attracted about $4.27 billion in assets, respectively, in the month.

The same low expense ratio logic is applicable here too. VOO charges 4 bps in fees while SPDR S&P 500 ETF Trust (SPY - Free Report) , which charges 9 bps in fees,lost about$19.5 billion in assets.

Junk Bonds Fell Flat

The first quarter was all about rising rate worries. The yield on the benchmark U.S. Treasury started the year with 2.46%, hit a high of 2.94% in February, but finally came down to 2.77% on Mar 28. The average benchmark bond yield in Q1 was around 2.759%. No wonder, with this kind of steady yields offered by Treasuries, high-risk junk bond ETFs, which investors mainly target to enjoy solid current income, will fall out of favor.

SPDR Bloomberg Barclays High Yield Bond ETF(JNK - Free Report) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report) saw their assets shedding about$3.61 billion and $3.42 billion in assets, respectively.

Real Estate Out of Favor

The sector underperforms in a rising rate environment. Yield-hungry investors normally have a large appetite for REIT stocks as the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends.

As a result, in a rising rate environment, the appeal for this yield gets quelled. Plus, dependence of REITs on debt for their operations makes it a losing proposition in an era when the Fed is deemed to hike rates faster. Vanguard Real Estate ETF (VNQ - Free Report) , which yields about 4.92%, shed about $2.24 billion in the quarter (read: January ETF Asset Report: S&P 500 Wins, High-Yield Loses).

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