There's no equivalent of the Chinese calendar in the investment sector. Still, 2012 was clearly the year of the ETF.

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Morningstar reports that the net fund flow for ETFs reached a record $191 billion in 2012, surpassing the previous record of $169 billion in 2008. While "2008 had strong equity flows, 2012 had strong international and fixed-income flows," says Michael Rawson, an ETF analyst at Morningstar.

The year ended with a bang, as a net flow of $37.7 billion in new money in December pushed the year far past the old mark. Combined with the strong flows, market appreciation helped to increase total assets in U.S. ETFs to $1.35 trillion. ETFs now account for 13% of the total combined assets of ETFs and mutual funds, excluding money-market funds.

With $123 billion in assets as of Dec. 31, SPDR S&P 500 is the largest U.S. ETF by a substantial margin, according to Morningstar. SPDR Gold Shares ranks No. 2, with $72.2 billion in net assets. SPDR Gold Shares registered a return of 5.26% for the year.

Even though SPDR S&P 500 had a robust return of 15.84%, much of its appeal has to do with liquidity, Rawson says. "The SPDR S&P 500 is probably the most liquid security on the planet, trading $20 billion in volume a day," he explains. "At times and for large institutions, it can be traded for essentially a zero bid-ask spread. Thus, traders use it to quickly make directional bets on the market, so it has massive in- and outflows dependent on sentiment."



By sector, housing and real estate funds led the Morningstar list of top performers, reflecting a moderately improving housing market. Two of the three ETF funds with the largest percentage gains for the year - iShares Dow Jones US Home Construction, up 78.87%, and SPDR S&P Homebuilders, up 57.53% - were housing instruments, while Vanguard REIT Index had a 17.67% return.

In addition, "emerging market equity and debt are very strong," Rawson says. Among the 20 largest ETFs, Vanguard MSCI Emerging Markets was up 18.84% and iShares MSCI Emerging Markets Index gained 17.32%.

Taxable bond funds were also on the upswing. In 2012, the assets of taxable bond ETFs hit $225 billion, up from $53billion four years ago.



The two biggest losers were green energy funds: Guggenheim Solar, which plunged 31.86%, and Market Vectors Solar Energy, which sank 31.81%. Traditional energy funds like Market Vectors Coal, down 21.03%, and PowerShares Global Coal, off 16.8%, also suffered.

Rawson says the market is increasingly rewarding products with low fees. The Pimco Total Return ETF was the most successful new product of last year, attracting almost $4 billion. Morningstar says its expense ratio undercuts that of the cheapest share class of the Pimco Total Return mutual fund.



Laton McCartney is a New York writer who's contributed to Money Management Executive and Information Management.

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