In the primary market we saw healthy two-way activity. Overall levels of ETF creations matched redemptions but gross trading volume exceeded US$200 million.  Several factors contributed to this.

First, we saw large over-the-counter trades in emerging markets ETFs.  Most ETF managers reported bumper asset growth in funds such as Lyxor ETF MSCI Emerging Markets (NYSE Euronext: LEM) (which added €216 million in assets), the iShares FTSE BRIC 50 ETF (LSE: BRIC), iShares FTSE/XINHUA China 25 ETF (LSE: FXC) and the db x-trackers Emerging Markets ETF (LSE: XMEM).  These investor inflows were consistent with the overweighting of China by many investment bank strategists in their 2010 model portfolios. We also witnessed heavy investments into Brazil ETFs such as the Lyxor ETF Brazil Ibovespa (NYSE Euronext: RIO), the iShares MSCI Brazil (LSE: IBZL) and the db x-trackers MSCI Brazil TRN ETF.

Second, there were large redemptions in ETFs tracking Japanese equities, such as the Lyxor ETF Japan TOPIX (NYSE Euronext: JPN) and the iShares MSCI Japan ETF (LSE: IJPN).

Third, there was an exodus from cash ETFs assets such as the Lyxor ETF Euro Cash (NYSE Euronext: CSH) and the iShares eb.rexx money market ETF (LSE: EBMMEX) as investors preferred corporate bond, equities and real estate assets. Short-maturity US government bond ETFs such as iShares Barclays 1-3 Year Treasury Bond ETF (LSE: SHY) were also heavily sold. Thin liquidity at the year-end seemed to contribute to the equity market rally, meaning that institutional investors wanted to be fully invested.

Last but not least, we witnessed big inflows into US equity ETFs, such as the iShares MSCI North America ETF (LSE: INAA) and the iShares S&P 500 ETF (LSE: IUSA), with ETFs linked to the Russell 2000 index also seeing demand.  Overall creations topped US$1billion.

Sectorwise our traders saw healthy creations in ETFs tracking the DJ Stoxx 600 utilities (SX8P), retail (SXMP) and food and beverage (SX3P) indices. For the whole of 2009 telecoms has proved the most popular sector amongst ETF investors, followed by basic resources.  Financial services has been the least popular, with outflows in the year.

In corporate bonds, and contrary to previous comments, demand did not exceed supply, the two remaining fairly balanced.  However, we saw creations of over €50 million in euro-denominated funds and around US$190m in the US-listed iShares iBoxx $ Investment Grade Bond Fund (NYSE Arca: LQD).

LSPE wishes you all a happy new year and prosperous ETF trading!

This report is not an offer to sell or a solicitation of any investment products or other financial product or service, an official confirmation of any transaction, or an official statement of LSPE.