ETFs scored big in the first quarter as equity demand surged

Exchange-traded funds are off to their best start ever, thanks to a surge in demand for equities. Investors poured a record $70 billion of net inflows into ETFs during the first quarter, topping last year's $65 billion, according to BlackRock Inc. More than 90% of the inflows, $65 billion, went into equities. Last year, just 65% of ETF inflows went into equities, according to Morningstar Inc. The flows into equities were helped by a strong market that saw several asset classes with double-digit returns and new all-time highs for both the Dow Jones Industrial Average and the S&P 500. The equity-centric flows in ETFs stand in stark contrast to mutual funds, where bonds had a slight edge year-to-date through March 20, the most recent data available. Bond funds had taken in about $67 billion, while equity funds had $62 billion of inflows. Because the majority of ETF assets are in equities already, it isn't surprising to see such heavy equity flows, said Morningstar analyst Mike Rawson. Fixed-income ETFs had $11.5 billion of inflows, down from $19.6 billion during the first quarter of last year. “Bond ETFs are gaining ground on mutual funds, but most people don't typically think to index that side of their portfolio,” Mr. Rawson said. One reason is that actively managed bond funds have done well against their benchmarks, unlike most equity funds. Almost 80% of investment-grade intermediate-term bond funds beat the Barclays Aggregate Index in 2012, according to Standard & Poor's. Over the previous five-year period, 60% outperformed. The most popular ETF was the $5.6 billion WisdomTree Japan Hedged Equity ETF (DXJ), which had just shy of $4 billion of net inflows. Dividend income and minimum volatility strategies were among the most popular ETF strategies, with inflows of $7.5 billion and $4.1 billion, respectively.