The ETF market ended 2010 looking forward to an economic recovery, even though unemployment remained high at 9.8%. As 2011 began, those hopes dimmed, however, replaced with concerns over rising oil price and growing instability in the Middle East. ETF investors hesitated, uncertain whether to pull back or continue the rally.

By the end of January, there were 972 ETFs holding assets of just over $1 trillion, according to the most recent data available from State Street Global Advisors. Assets rose $8.8 billion in the month, just a 0.9% increase. Not surprisingly, two of the top categories were energy and precious metals.

 

OIL AND GOLD

Energy ETFs did particularly well in the first two months of the year; the SPDR Select Energy Fund (XLE) gained steadily to return 13.5%, says Tom Anderson, global head of ETF strategy and research for State Street. And oil and gas exploration ETFs (XOP) have taken in about $1.3 billion in net new assets.

Miscellaneous commodities was the next best-performing group, gaining 11.7% by the end of February. "Concerns about oil supplies drove up the values of commodities" as a whole, Anderson says.

Precious metals were up 9.6%. That group had a mixed story, according to Anderson. It lost money in January then rebounded strongly in February. Anderson attributes the volatility to a flight to safety amid concerns about government upheavals in North Africa and the Middle East.

The iShares MSCI EAFE Index Fund rose 5.7% in January and February. But hopes of a continued global rebound have been put in doubt by fears that the unrest in Libya could spread. The unrest may explain the drop in the iShares MSCI Emerging Markets Index, which was down -4.4%.

The turmoil has consequences for oil futures, since Libya is a major producer and exporter. At press time, West Texas Intermediate, the benchmark U.S. oil contract, rose to $101.10 a barrel for April delivery. Brent crude, the main contract for Europe and other global markets, rose to $116.12 a barrel. Global ETFs were down 6.9%, also on fears of spreading political turmoil.

 

BOND MOVES

The chase for yield and income-generating investment products continues to be a priority, but investors are also looking for insulation against inflation. "What we're talking to advisors about is dividend-oriented stocks and yield-oriented bond ETFs," Anderson says. "There is interest in income, but caution on rising interest rates."

The SPDR Barclays Capital Convertible Bond ETF, CWB, had $163 million in flows, while the SPDR Barclays Capital Convertible Bond ETF, SCPB, took in $130 million. He predicts investors will continue to seek corporate and convertible bonds, which are less sensitive to rising rates.

"We had really strong flows into high-yield bonds in 2010, and it has just continued," Anderson says. The high-yield bond category, took in $761 million since January.

Despite fears of ballooning state debts and deficits, municipal bond ETFs, surprisingly, still turned in a middle-of-the-road performance. The Muni California Intermediate, the best muni performer, was up 1.7%.