Equity the main attraction among ETF buyers

Exchange-traded funds ended the first quarter of 2013 strong, posting their 16th consecutive month of net inflows at $13.5 billion in March.

Combined with the first two months of the year, ETFs saw quarterly net inflows of roughly $51 billion.

Stock and mixed-equity ETFs, with net inflows of $44.5 billion in the first quarter, once again were the main attractors of new assets.

U.S. diversified equity ETFs (+$19.8 billion net) were the focal point as investors showed a preference for domestic products.

World equity ETFs reported net inflows of $15.8 billion, most of which came from strong net inflows to emerging-markets products at the beginning of the year.

Interest in sector equity ETFs (+$8.5 billion net) strengthened from the previous quarter, while net inflows for mixed-equity ETFs (+$290 million) were relatively flat.

For the quarter, equity funds on average returned a robust 7.68%. Not counting last year’s first-quarter return of 12.22%, when investors turned their attention to smaller-cap, defensive and out-of-favor issues, one would have to go back to 1998, when equity funds gained an average 12.04%, to find a better first-quarter performance.

While Lipper Inc.’s major fund macro-groups remained in positive territory for the quarter, a few 2012 fourth-quarter winners were forced toward the bottom of the heap, with India-region funds dropping an average 7.47% and China-region funds slipping an average 1.79%, together lowering the overall return of world equity funds to an average 3.81%.

As investors began focusing on out-of-favor issues, sector classifications at the top of the equity fund leader board included health/ biotechnology funds, which were up on average 15.53%, equity leverage funds, up 15.36%, global health/biotechnology funds, up 14.57%, and midcap-value funds, up 13.74%.

Much as for the fourth quarter of 2012, the primary equity classification laggards for the first quarter of 2013 were precious-metals equity funds, down 16.93% on average, and dedicated short-bias funds, down 11.57%. New to the list was one of the previous quarter’s leaders, the aforementioned India-region funds, which declined 7.47% on average.

For the fourth consecutive quarter, investors remained focused on dividend payers and value-oriented issues, with value-oriented funds gaining an average 12.03%, clearly outpacing their growth-oriented brethren, which added 9.95%. For the first time since the fourth quarter of 2011, small-cap funds rose to the top of the leader board with a 12.15% advance on average, as investors tired of the wild swings in a few of the big-name tech stocks.

Continued weakness in commodities, an adequate supply of most base metals and an absence of inflation — despite the Federal Reserve’s easy-money regime — put some pressure on select classifications in the sector equity funds macro-group, which gained, on average, 5% for the quarter.

Tom Roseen is head of research services for Lipper Inc.