Bonds, alternatives, international funds see inflows, according to Morningstar

Morningstar, Inc. today reported estimated U.S. mutual fund and exchange-traded fund asset flows through September 2010.

While long-term mutual funds saw inflows of $14.3 billion during the month, the U.S. equity outflows continued, reaching $16.3 billion despite the best September for stocks in 71 years. The divergence in flows between international-stock and domestic-equity funds also continued to grow. Although international-stock funds saw modest inflows of $600 million in the third quarter, U.S. stock funds lost roughly $42.7 billion. Investors have pulled $80.9 billion from U.S. stock funds over the trailing 12 months, but contributed nearly $34.3 billion to international-stock funds--a difference of $115.2 billion. U.S. ETFs saw inflows of roughly $25.4 billion in September, boosting year-to-date inflows to $64.9 billion.

Additional highlights from Morningstar's report on mutual fund flows:

• Taxable-bond funds enjoyed another strong month, with inflows of $23.5 billion. After two months of inflows, money market funds saw redemptions of $29.1 billion in September, bringing total redemptions for the asset class to $873.5 billion since January 2009.

• Notwithstanding their volatile performance since the market peaked in October 2007, investors have steadily contributed assets to alternative funds. Bear-market funds saw inflows of $3.5 billion over the past three years despite annualized losses of 12.4 percent, and long-short funds attracted $21.8 billion in flows even though the average fund dropped an annualized 3.6 percent.

• Although commodity funds have taken in nearly $7.5 billion in 2010, bringing overall assets to $33.6 billion, investor sentiment may be shifting from broad-basket commodity funds to equity precious-metals funds. Equity precious-metals funds have been the best-performing category over the last decade by far, earning an annualized 24.3 percent through September. The category's inflows of $692 million during the month topped inflows of $654 million for broad-basket commodity funds.

• While PIMCO and Vanguard continued to dominate inflows in September thanks to their broad fixed-income offerings, Matthews Asia funds attracted assets of nearly $800 million during the month. Reflecting investor preference for non-U.S. equity exposure, the firm has absorbed $2.9 billion in 2010.

Additional highlights from Morningstar's report on ETF flows:

• The most-popular ETF asset class in September was U.S. stocks, with inflows of $16.7 billion. While inflows into the heavily traded SPDR S&P 500 SPY and PowerShares QQQ QQQQ bolstered assets for U.S. stock ETFs overall, the predominant theme in the current environment is investor appetite for dividends. iShares Dow Jones Select Dividend DVY and Vanguard Dividend Appreciation VIG have seen a spike in demand in recent months.

• While TIPS ETFs have seen outflows on deflationary concerns, commodities, REITs, and dividend-paying ETFs have enjoyed increasing popularity. REITs serve as a solid inflation hedge, and iShares Dow Jones US Real Estate IYR and Vanguard REIT Index VNQ saw $312 million and $371 million in net inflows in the third quarter, respectively.

• Gold ETFs remained attractive in September, but iShares Silver Trust SLV gathered assets of more than $421 million to lead precious-metals ETF flows during the month.

• Strong demand for emerging-markets ETFs continued in September. Of the $14.5 billion in inflows that investors added to international-stock ETFs in the third quarter, more than $12.5 billion, or 86 percent, went to ETFs covering broad emerging-market indexes. Conversely, ETFs offering exposure to developed international markets continued to experience outflows.

To view the complete report, please visit http://www.global.morningstar.com/septflows10.