Michael Traynor

http://www.indexuniverse.com/sections/in-the-spotlight/5804-nsx.html?Itemid=163

Investors Go Short — At Just The Wrong Time
Written by Murray Coleman
Tuesday, 05 May 2009 16:12
Page 1 of 5


In April, the "smart money" looked pretty dumb.

With the S&P 500 up some 9.6% in the month, net inflows into exchange-traded funds topped $8.1 billion as assets swelled to nearly $535.3 billion, according to data compiled by the National Stock Exchange.

The overwhelming favorites in April were funds that take short positions on different indexes. Almost $8.8 billion inflow went into such so-called inverse ETFs. And most of those flows concentrated on ETFs shorting large-caps as well as a few select sectors. Chief among those were inverse ETFs focusing on financials.

The bulk of that trading probably came from institutional pros such as hedge fund managers and large corporate investors, says Michael Traynor, the NSX's chief strategy officer. (See complete tables of the most recent data at the end of this article.)

He noted the old adage that historically investors have shown an uncanny ability to pick the worst times to make their moves. As such, fund flows over time have become considered as contrarian investment indicators.

"April seemed to be an indication of that bad timing again," said Traynor with a laugh.

In ETFs taking short positions, the data is broken into two areas: short and leveraged short. Both showed similar trends, although the strongest was in the latter category. Here's a recap of each for April:

Short leveraged ETFs had net inflow of almost $8.2 billion, of which nearly $7.9 billion came from domestic funds. Global and international attracted $143 billion of that total, and fixed income had $154 billion. Currencies were up slightly and commodities were down slightly.
Nonleveraged short ETFs totaled $608 million in net inflows, with U.S.-focused portfolios accounting for $579 million of that total.
By comparison in April:

Long-only ETFs attracted nearly $2.5 billion. But that doesn't tell the real story. Domestic long-only ETFs had net outflow of more than $6.3 billion, while international and fixed-income funds had net inflows surpassing $4 billion each.
ETFs that use leverage to go long had net outflows of nearly $2.8 billion. Almost all of that came from domestic-focused ETFs. Leveraged currency ETFs also were slightly down in terms of flows, but global and fixed income were slightly positive. Commodities had the best showing in the category with net inflows of $127 million.
Exchange-traded notes were also up in the month, attracting $282 million in net inflow and reaching $4.9 billion in assets.
For the year through April, ETFs had net inflow of $11.9 billion, up from $6.7 billion a year earlier. But ETNs had $707 million net inflow for 2009, down from nearly $1.2 billion at the same time in 2008.

Trading volumes weren't included in the April data tables. According to Traynor, though, the month saw ETFs, as a whole, average about 2.4 billion shares in daily volume. Nearly 43% of that activity was in the leveraged and inverse fund categories.
"That's an astonishing level," said Traynor.

For April, trading volume for all securities—including individual stocks—averaged about 11.2 billion shares per day. Although ETFs made up about 21% of that total, Traynor figures that the nature of recent money flows made the actual impact of ETFs in the marketplace much greater.

"You've got to figure that with all the money going into leveraged instruments, there's a lot of rebalancing activity and trading of shares in equity portfolios taking place that are indirectly related to ETF moves," he added.