‘Taper tantrums’ aside, a strong 4th quarter for ETFs

While investors continued their bipolar behavior during the fourth quarter, throwing “taper tantrums” at any sign of strong economic news and rallying the markets on bad news, they began to understand that the Federal Reserve’s removal of the punch bowl would be a sign of an improving economy.

The Fed did a better job than in prior quarters communicating to investors that it wouldn’t make any changes until the economy was strong enough to support such actions and that short-term rates would remain low for the foreseeable future.

And yet, during the first two weeks of December, a stronger-than-anticipated jobs report led to tapering concerns and caused the broad U.S. markets to decline.

For the quarter, the average equity exchange-traded fund posted a 5.45% return, compared with the 9.56% return posted by the Dow Jones Industrial Average and the 10.47% return by the Nasdaq Composite Index. The ETF average return was dragged down by the inclusion of commodities ETFs (-2.99%), alternatives ETFs (1.52%) and emerging-markets ETFs (2.08%).

For the quarter, investors bid up domestic issues, pushing large-cap ETFs (10.17%), multicap ETFs (9.62%), and small-cap ETFs (9.55%) to the top of the charts. However, shrugging off the possible impacts Fed tapering might have on emerging markets, investors cheered a slight improvement in the rupee and the economic reforms in India, which pushed the out-of-favor India region ETFs classification (16.6%) to the top of the leader board for the quarter.

Market Vectors India Small-Cap Index ETF (SCIF), iShares MSCI India Small-Cap ETF (SMIN) and EGShares India Small Cap ETF (SCIN), posting 25.72%, 23.55% and 22.83% returns, respectively, had the strongest fourth-quarter returns in the equity ETF universe, excluding leverage and short-biased issues.

DECLINE FOR THE YEAR

But caveat emptor. On an annualized basis, the India region funds classification was down 11.08% last year.

Despite investors’ enthusiasm for domestic-equity issues during the quarter, authorized participants also injected some $22.6 billion net into developed international market ETFs. U.S. diversified equity ETFs attracted the next-largest sum, $19.8 billion.

As one might expect, given all the records set by the major domestic indexes during both the quarter and the year, the main attractor of equity ETF assets in the fourth quarter was SPDR’s S&P 500 ETF Trust (SPY) in Lipper’s U.S. Diversified Equity Group, which took in almost $14.2 billion net. However, two of the five top attracters of authorized participants’ assets were housed in Lipper’s Developed International Market ETFs classification, with iShares MSCI EAFE ETF (EFA) and Vanguard FTSE Europe ETF (VGK) attracting $4.6 billion — the second-largest net inflows of the equity universe — and $2.4 billion for the quarter, respectively.

Tom Roseen is head of research services for Lipper Inc.