Content provided by Rui Wang, CLS Investment Research Analyst

Since the 2009 market recovery, the ETF industry has continued to thrive. I have researched the ETFs that were launched two to three years ago, and summarized the top 20 ETFs with the largest average monthly net cash inflow since inception. As the below chart shows, most ETFs have experienced rapid growth in size. The purpose of this analysis was to review the hottest trends or investment themes during the past a few years with the help of ETF flow data. Note that trading tools such as leveraged or short ETFs are excluded from this analysis.

The following are some of my conclusions from the analysis:

1. Investors are thirsty for income when rates have been artificially low, supported by the fact that more than half (11 out of 20) of the top 20 ETFs are income related. Five ETFs are equity ETFs with high dividend or other income, four ETFs are fixed income ETFs with high yields, and two ETFs are fixed income ETFs with a floating rate feature.
2. Many investors are interested in low-risk ETFs, as 5 of the 20 ETFs in the list are designed to have consistently lower risk than the broad market, while maintaining the full equity exposure. The low risk of these equity ETFs can be appealing to balanced funds because holding low-risk equity ETFs can increase the funds’ overall equity exposure without adding too many bonds to counteract the risk brought by equities. In a low rate environment, it is a decent strategy to pick up low risk capital gains to compensate the low interest income in a balanced portfolio.
3. Passive investors are price-sensitive. Two of the Vanguard ETFs in the list are meant to gain net flows by offering lower fees relative to competitors. These broad market tracking ETFs, Vanguard S&P 500 ETF and Vanguard Total International Stock Index ETF, are inexpensive options in broad markets like S&P 500 and MSCI ACWI ex U.S.

The ETFs chosen were selected based upon net cash inflows.  While clients of CLS may have previously owned one or more of these ETFs, this research was not prepared to reflect any bias or specific recommendation.

An ETF is a type of investment company whose investment objective is to achieve the same return as a particular index, sector, or basket. To achieve this, an ETF will primarily invest in all of the securities, or a representative sample of the securities, that are included in the selected index, sector, or basket.  While ETFs tend to be lower in cost to other investment companies, such as mutual funds, costs still apply; refer to the prospectus for complete details on the fees associated with the security.  Diversifiable risks will heavily depend on the specific ETF invested in.  The primary diversifiable risk is business risk.  Other diversifiable risks may apply based on the assets which the ETF invests in.

0689-CLS-4/4/2014