As economy improves, ETF investors take note

Investors are plowing money into equity ETFs, betting that an expanding economy will overwhelm concerns such as slowing earnings growth

May 3, 2014 @ 12:01 am (Updated 4:05 pm) EST

equity, stocks, etfs, earnings, economy, fed stimulus, valuations, S&P 500

The U.S. economy is showing signs of improvement and buyers of exchange-traded funds are taking note.

Investors have sent $5 billion to funds tracking U.S. stocks since the beginning of April, equal to 39% of all equity flows for the month, according to data compiled by Bloomberg. That compares with $600 million from January through March, or 22% of the total. Funds tracking the Standard & Poor's 500 Index (SPX) and energy stocks got the most money.

“Confidence is increased, and institutional and individual investors and even strategic buyers are all adding to stocks,” said Howard Ward, chief investment officer for growth equity at Rye, New York-based Gamco Investors Inc., which oversees about $47 billion. “It's stepped up recently as the market has hit new highs.”

Data such as Friday's Labor Department report showing unemployment fell to the lowest level since September 2008 are helping. Investors are buying even as the S&P 500 approaches a record and the Federal Reserve removes stimulus that underpinned a five-year bull market in which $14 trillion was added to equity values.

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Investors plowing money into funds tracking U.S. shares are betting an expanding economy will overwhelm concerns such as slowing earnings growth, rising valuations and the end of Fed stimulus. While the S&P 500 has gained 179% since global stock markets bottomed in March 2009, its 2% advance in 2014 is the weakest start to a year since the bull market began.

BIG PICTURE

The S&P 500 trades at about 17 times earnings, near the highest level since 2010, data compiled by Bloomberg show. Earnings for companies in the index are forecast to increase 7.2% in 2014, down from 7.4% growth last year.

“The economic news, underscored by the payroll report, is improving,” Mr. Ward said. “It's a tremendous number, and people need to focus on the big picture.”

The job-creation engine kicked into higher gear as U.S. employers boosted payrolls in April by the most in two years and the jobless rate plunged. The 288,000 gain in employment was the biggest since January 2012, Labor Department figures showed. Unemployment dropped to 6.3%.

The S&P 500 has risen for nearly 31 months without a decline of 10% or more, versus the average of 18 months since 1945, according to data from S&P Capital IQ strategist Sam Stovall.

Energy, health-care and real estate ETFs have absorbed the most money among industry funds this year, taking in more than $3.5 billion each, data compiled by Bloomberg show. Investors have pulled the most cash from technology and consumer discretionary funds.

“It's a reflection of risk appetite in the market,” said Robert Stimpson, a fund manager at Oak Associates Ltd. in Akron, Ohio. His firm manages about $1 billion. “They're reallocating to a little more blue-chip field.”

Flows into U.S. equity ETFs are outpacing fixed income. U.S. bond ETFs have absorbed $4.5 billion since April, less than the $5.3 billion sent to equity funds, data compiled by Bloomberg show.

In debt markets, ETFs tracking international government bonds attracted the most cash among overseas funds. Since the beginning of April, about $856 million has been sent to foreign funds, adding to the $229 million deposited during the first three months of the year, according to data compiled by Bloomberg.

About $364.1 million was added to the iShares J.P. Morgan USD Emerging Markets Bond ETF since the beginning of last month. The Pimco Total Return Exchange-Traded Fund saw redemptions of $75 million during that time.

“There's no incentive to invest in the bond market right now,” Jeff Sica, president of Sica Wealth Management, which oversees more than $1 billion, said in a phone interview. “The Fed orchestrated an artificially low interest rate environment to push investors into the stock market.”

(Bloomberg News)

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