Index-based ETFs a factor in reduced trading volume
By Kate Gibson, MarketWatch
NEW YORK (MarketWatch) — The U.S. stock market’s stellar performance in 2012 is remarkable in part for the anemic trading volumes that have accompanied Wall Street’s rise.
“After a decade or so of not really making any money in the marketplace, people give up,” said Bruce Norton, president of Whitebox Mutual Funds.
Data suggest it has been primarily the retail investor that has remained on the sidelines as the S&P 500 SPX -0.08% marked the start of the bull market’s fourth year by targeting, and then overtaking, 1,400 -- a level not hit since 2008.
The index is up nearly 12% this year, while the Dow Jones Industrial Average DJIA +0.05% has gained 7.8% and the Nasdaq Composite COMP -0.45% has advanced more than 18%.
At the same time, cash has flown out of domestic equity mutual funds, more typically used by small investors or advisers acting on their behalf. Yet, business has been booming for exchange traded funds, or ETFs, which draw roughly half of their business from institutional investors including hedge funds, says Loren Fox, senior research analyst at Strategic Insight.
“There is still a large portion of the investing public that is anxious about the stock market, coming after the big financial crisis, bear market, and then after that, last year was incredibly volatile. That doesn’t breed a lot of confidence,” says Fox.
Absent traders
Daily volume levels reflect that anxiety. The volume of New York Stock Exchange-listed shares traded on all exchanges has averaged 3.8 billion this quarter, down 14% from the first quarter of last year and the lowest average volume for a first quarter since 2007, according to the Wall Street Journal’s data group.
“There is a lot of sitting on hands,” says Peter Boockvar, equity strategist at Miller Tabak.
Daily volume of S&P 500 stocks, irrespective of stock exchange, is averaging 5.8 million in 2012, versus 6.3 million in 2011, 6.7 million in 2010 and 8 million in 2009, according to Factset Research Systems Inc.
Signs that investors are throwing in the towel appear in domestic mutual equity funds. Last year marked a fifth year in a row of more money departing than coming in.
“That’s a pretty long trend,” says Shelly Antoniewicz, a senior economist at the Investment Company Institute, or ICI.
The trend spilled into the new year: January and February marked the ninth and 10th consecutive months of outflows from domestic equity mutual funds. And, the trend continued into March, with an estimated outflow of $6.07 billion for the first three weeks of the month.
Outflows are working off a very large base. The $135 billion that came out of domestic equity mutual funds in 2011 represents 3.5% of the overall $3.8 trillion held, she adds.
Still, the trend is unlikely to reverse anytime soon, regardless of economic conditions or how the stock market is perceived.
“I think it’s a combination of ETFs gaining market share, and certainly individual stocks, losing,” says Jim Russell, chief equity strategist for U.S. Bank Wealth Management in Cincinnati.
“ETFs are seen as a low-cost solution to gain market exposure in a one- transaction kind of way. Management fees are very low compared to some of the alternatives out there,” says Russell.
