(Editor's Note: The following is ex-Morgan Stanley analyst Paul Mazzilli's monthly research note for IndexIQ and part of the firm's latest ETF Insight newsletter.)

After a brief rally in January, the global equity markets continued to sell off in the following month as investors once again expressed concerns about economic news and the health of the global economy.

At the end of February, the Dow Jones Industrial Average stood at 7063 (down 19.5% for the year). The new administration's Fiscal Stimulus Plan has done little to calm the markets as the DJIA dropped below 6600—it's the lowest level since 1995. In this challenging environment, financial advisors and investors continue to seek ETF strategies that will perform well and dampen portfolio volatility.

• Interest in traditional equity ETFs has waned this year, and the issuance of new ETFs has slowed. In addition to falling markets shrinking the assets under management, the US and international equity ETFs experienced $28 billion in net outflows so far in 2009. Much of this is the reversal of year-end tax swaps utilizing ETFs.
• Investors continue to embrace ETFs as an efficient means of gaining exposure to alternative asset classes. Commodity ETFs had almost $13 billion in net cash inflows. The SPDR Gold ETF had $5.6 billion in net inflows in the month of February.
• Leveraged and Inverse ETFs continued to experience significant growth. Although there are issues regarding tracking error and tax efficiency, they experienced $6.4 billion in new flows. These types of ETFs are favored by active traders. Although they make up just 5.6% of ETF assets under management, they now represent over 27% of ETF average daily trading volume in dollar terms.
• A significant amount of ETF flows this year have gone into commodities ETFs, as investors believe that the government stimulus will bring renewed inflation. Financial ETFs have also experienced growth as government intervention seeks to stabilize the Financial Sector.
• There continues to be significant appetite for unique and differentiated ETFs, especially in the alternative investment space. Although there is growing demand for Commodity ETFs, investors are currently unable to efficiently access hedge fundlike strategies.<

Key ETF Developments And Trends

• The U.S.-listed ETF market continued to contract in terms of assets under management, declining to $456 billion at the end of February, versus $530 billion at the end of 2008. The decline in assets was primarily due to the drop in the equity markets. The US and International Equity ETFs experienced significant cash outflows.
• Difficult markets continue to hinder ETF issuance and the growth of newer ETFs. As of the end of February, more than 200 ETFs had less than $10 million in assets.
• The number of US listed ETFs has declined by four so far this year. Northern Trust closed 17 ETFs (NETS), and exited the business. New issuance slowed with only 13 new ETFs being launched.
• Most new ETFs launched this year provide exposure to the fixed income markets. The most successful launch was the Van Eck's Market Vectors High-Yield Municipal ETF (HYD), the first high-yield municipal ETF. It was launched on February 5th and had amassed $77 million by the end of the month. Van Eck also launched a Market Vectors Pre-Refunded Municipal ETF (PRB) which had $10 million in assets at the end of February.
• Barclays Global Investors and State Street Global Investors each launched two new fixed income ETFs this year. These four ETFs have only gathered between and $5 and $9 million each in assets.
• New equity ETFs launched in 2009 provide exposure to smaller international countries such as Indonesia and Colombia. They have not gathered meaningful assets.
• There have been interesting changes in market share, Barclays Global Investors and State Street Global Investors both had negative cash flows for the first two months of 2009.
• ProFunds took in the most assets with almost $4 billion of new cash inflows so far this year and is now is the fourth largest ETF manager with over $22 billion in assets.
• Ameristock/Victoria Bay was second in terms of new cash flows this year as almost $2.7 billion went into its oil and natural gas ETFs and it is now the eighth largest US listed ETF manager.
• Direxion was third in terms of new cash flows this year taking in almost $2.2 billion. Its first triple leveraged ETFs came out late last year, and Direxion is already the twelfth largest US ETF manager.
• WisdomTree is changing the focus of two high dividend ETFs to omit financials. They will be renamed the WisdomTree Dividend ex-Financials Fund (DTN) and the WisdomTree International Dividend Ex-Financials Fund (DOO). They will be the first dividend-focused ETFs to exclude Financials. This will differentiate the products, but the timing may be questionable.

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