ETFs' start outpaces last year's

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 a report released last week by 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. Equity ETFs were helped by a strong market that saw new all-time highs for both the Dow Jones Industrial Average and the S&P 500. In the mutual fund space, bonds had a slight edge year-to-date through March 20. Bond funds had taken in about $67 billion, while equity funds had $62 billion of inflows.

EQUITY FLOWS NO SURPRISE

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 in inflows, down from $19.6 billion during the first quarter of 2012. “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 in net inflows. Dividend income and minimum volatility were the most popular ETF strategies, with inflows of $7.5 billion and $4.1 billion, respectively.