Did retail investors catch the top of the market?  Many individual investors missed the huge market gains from the lows in early 2009 and now many are playing catch-up.  Fresh data from Morningstar this morning shows total inflows and outflows for mutual funds and for ETF products through the end of October.  The surprise is is that many are still avoiding stocks entirely.

Morningstar’s research on inflows and outflows showed that investors contributed $26.8 billion to long-term mutual funds in October.  This is almost double what was contributed in September.  The surprise seen is that Morningstar showed that every asset class saw inflows during October, at least every asset class other than U.S. stocks.

The only good news for stocks is that the pace of outflows from domestic equity funds came in at a slower rate than before.  October’s redemptions from US equity funds was $6.3 billion, well under the $18.3 billion seen in September.

Morningstar showed that US ETFs saw inflows of $13.1 billion in October which has pushed industry total net assets to $944.7 billion if you consider the market appreciation in the calculations.

If not US-stocks, where then does the investing money go?

International equity funds and balanced funds saw inflows of $5.7 billion and $2.3 billion, respectively.

Investors are getting the message that cash is not king.  Outflows for money market funds came to $16.6 billion in October.  Money market funds’ share of total mutual fund assets has dropped to 25.7% from 33.4% over the past year.

Diversified emerging-markets funds saw $2.3 billion in inflows in October. Vanguard Total International Stock Index Fund saw inflows of $10.7 billion after Vanguard announced that the fund would replace Vanguard Emerging Markets Stock Index Fund, Vanguard European Stocks Index Fund, and Vanguard Pacific Stock Index Fund in its target-date lineup and in three funds of funds.

Long-term bond funds have seen tepid inflows remaining:

• Taxable-bond funds had solid inflows overall of $20.6 billion, but short-term bond funds have been supplanted in the rankings by world-bond and multisector bond funds, which absorbed $3.7 billion and $3.1 billion, respectively, in October.
• Municipal-bond funds took in $1.8 billion in October, but monthly inflows have been declining since September 2009.

Another data point is that Dimensional Fund Advisors broke into the Top-10 List of fund families by assets under management in October. The firm has taken in nearly $7.5 billion in 2010, and about one-third of those assets flowed to the firm’s emerging-markets equity funds.

The Competition from ETFs Versus Old-School Mutual Funds Persists…

International stock ETF inflows dominated with October’s inflows of $9.2 billion.  This now puts total inflows of $25.1 billion for diversified emerging-markets for calendar 2010.  Nearly 76% of total net inflows went in the direction of international equity ETF products.

Domestic stocks showed gains in the world of ETFs, showing inflows of $3.5 billion in October.  In addition to dividend-paying ETFs and other high yielding strategies, investors allocated capital to ETFs that could be QE2 winners with exposure to technology and financials.

There was an interesting development in commodity ETFs as well.  Despite the gains being seen in gold, silver, oil, food input products and on in the world of commodities, commodities ETFs saw outflows in October by the tune of about $197 million.
Specifically mentioned were the SPDR Gold Trust (NYSE: GLD) and the United States Oil (NYSE: USO).  Morningstar noted that outflows were $486 million from the gold ETF and $331 million from United States Oil.  Inflows were seen in silver and natural gas ETFs.

Vanguard has collected roughly 39 cents of every dollar in net inflows to U.S.-listed ETFs this year and introduced 16 new ETFs to the market in 2010. Vanguard’s ETF assets increased by more than 72% over the past year, raising the firm’s market share to 14.5% of industry assets.



Morningstar’s full report and more details is here.

JON C. OGG

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