BlackRock Investment InstItute

DIvIDenD DeluGe etp flows quarterly

july 2013

[ 2 ] D I v I D e n D D e l u G e

Dodd KittsleyHead of BlackRock ETP Research

Kathleen Van WinckelBlackRock iShares Business Intelligence

Ewen Cameron WattChief Investment Strategist, BlackRock Investment Institute

BlaCKRoCK InVEstmEnt InstItutEthe Blackrock Investment Institute leverages the firm’s expertise across asset classes, client groups and regions. the Institute’s goal is to produce information that makes Blackrock’s portfolio managers better investors and helps deliver positive investment results for clients.

executIve DIrectorlee Kempler

chIef strategIst ewen cameron watt

executIve eDItorjack reerink

overall industry inflows fell to $29.6 billion in the second quarter–down from a record first-quarter total of $69.7 billion and the lowest since the first quarter of 2010. see the table above and our interactive graphics. equities attracted a net $44.2 billion of inflows, led by funds focused on us and japanese stocks.

Bond funds had inflows of $6.2 billion, the lowest in 10 quarters. the commodity rout accelerated, with gold etps hemorrhaging $19.1 billion–more than twice the previous quarter’s record outflow.

Blackrock collects and analyses industry wide data of roughly 5,000 etps globally in monthly ETP Landscape reports.

the opinions expressed are as of july 2013 and may change as subsequent conditions vary.

Q2 2013 Flows

(Bn)

% oF Q1 2013 assets

12-month Flows

(Bn)

cuRRent assets

(Bn)

12-month assets chanGe

numBeR oF

FunDseQuItIesDeveloped $56.4 4.6% $192.3 $1,292.8 35.8% 2,092 emerging -$12.2 -4.4% $31.4 $237.6 11.5% 763 total $44.2 2.9% $223.7 $1,530.4 31.4% 2,855 FIXeD Incomecorporate -$1.4 -1.2% $16.3 $114.6 15.1% 163 government $6.4 9.6% $2.9 $72.9 4.3% 332 total $6.2 1.8% $46 $342.1 13% 747 commoDItIesgold -$19.1 -15.2% -$16.7 $78.6 -36.9% 115 total -$20.8 -11.4% -$15.6 $125.9 -29.4% 922 otheRs $0.1 0.1% $2.4 $39.3 27.6% 344GRanD total $29.6 1.4% $256.5 $2,038 21.5% 4,868

helIcopteR vIewGlobal etp trends, 2013

Source: BlackRock. Data as of 15 July 2013. Notes: Totals include other categories. Government bonds exclude municipal bonds and inflation protected securities.

click for interactive data

Dividend DelugeMany income-starved investors have turned to dividend stocks as bond alternatives. exchange-traded products (etps) focused on dividends have rushed to meet this demand. we detail the money flows, country and sector compositions, and most widely held stocks of this group of funds. highlights include:

} Dividend etps have gathered $87 billion in assets, accounting for 5.7% of total global equity etp assets.

} the number of dividend etps has grown 75% since 2010, outpacing growth in fixed income etps and the total etp market.

} Dividend etp flows closely track etps specialising in investment grade bonds–and tend to move inversely with flows into cyclical stocks.

} funds vary greatly in industry sector exposure and yield because of differences in methodologies and selection criteria.

} us stocks dominate the holdings of the top 14 divided etps with an 82% share.

} the top 25 stocks held by dividend etps make up 30% of total assets.

} stock concentration within industry sectors is relatively high, with the top five stocks making up 65% of energy holdings of dividend etps.

B l a c k R o c k I n v e s t m e n t I n s t I t u t e [ 3 ]

Source: BlackRock. Data as of 15 July 2013.

DevelopeD matteRsequity etp Flows and assets, Q2 vs. Q1 2013

EMERGING

EMERGING

DEVELOPED

DEVELOPED

Q1

2013

FLO

WS

Q2

2013

FLO

WS

0 $70 BILLION10-10 20 30 40 50 60 $8

$116

$143

$92

$134

$65

$114

$859$1,530bn

TOTALASSETS

EMERGING

DEVELOPED

Developed markets: North america n europe n other n global ex-us n global n

emerging markets: Broad n country n regional n

Is InFlatIon DeaD?Fixed Income etp Flows and assets, Q2 vs. Q1 2013

Q1

2013

FLO

WS

Q2

2013

FLO

WS

0 10 $15 BILLION5-5

GOVERNMENTINFLATION

HIGH YIELD

$342bnTOTAL

ASSETS

$78$73

$29

$36

$19

$42

$65

CO

RPOR

ATE

Source: BlackRock. Data as of 15 July 2013. Note: ‘Other’ includes categories such as government/corporate, mortgages, municipals and bank loans.

Investment grade n high yield n government n other n Broad/aggregate n Inflation n emerging Market n

Investors poured $56.4 billion into developed market equity etps–near record first-quarter levels. funds focused on North american funds made up the bulk of inflows with a 59% share. japan funds attracted a record quarterly $18 billion on expectations of monetary stimulus and structural reforms. the Bank of japan lent a helping hand; it reported buying $3.6 billion of japan etps in the second quarter under its asset purchase programme. europe-focused funds attracted a scant $630 million. see the chart above.

Investors yanked money from emerging market funds five straight months in a row. expectations of a ‘tapering’ in the us federal reserve’s bond buying, slowing growth in china and fears of an emerging market funding crisis gave investors pause. outflows totalled $12.2 billion. the lion’s share (around 92%) was from broad emerging market funds.

fixed income etps attracted $6.2 billion–the slowest rate since the fourth quarter of 2010. the ‘great rotation’ into equities has not arrived yet–but it is real within fixed income. Inflation-protected bond etps had record outflows of $3.4 billion as inflation fears subsided. us core consumer prices in june rose at the slowest pace in two years. high yield funds lost a record $2.1 billion and emerging market debt lost a record $1.2 billion. see the chart below.

News the fed could start to wind down its bond buying programme led to a stampede into short-term bonds, which are less vulnerable to rate rises than longer-dated securities. flows into short maturity funds (three years and less) accelerated to a record $13.6 billion. Intermediate, long-term and broad maturity bond etps recorded outflows of $7.4 billion.

[ 4 ] D I v I D e n D D e l u G e

pRecIous lossescommodities etp Flows and assets, Q2 vs. Q1 2013

Q1

2013

FLO

WS

Q2

2013

FLO

WS

0-5-10-15-20-25 $5 BILLION

GOLD

GOLD

$126bnTOTAL

ASSETS

$11$8

$5

$17

$5$2

$79

Source: BlackRock. Data as of 15 July 2013.

gold n Broad Market n silver n energy n agriculture n other precious Metals n Industrial Materials n

NU

MB

ER

SHA

RE

OF

OVE

RA

LL

160

120

80

40

0

8%

6

4

2

02010 2011 2012 2013

Number of Dividend ETPs ■ Share of Overall Equity ETP Assets

Source: BlackRock. Data as of 15 July 2013.

us DomInatIonGlobal Dividend etp market size and 2013 Flows

us euRope DevelopeD emeRGInG total

ass

Ets

(Bn

) Dividend $61 $3 $79 $8 $87

all equity $822 $143 $1,293 $238 $1,530

Dividend share 7.4% 2.3% 6.1% 3.4% 5.7%

2013

Flo

Ws

(Bn

)

Dividend $9 $0.5 $13.6 $1.6 $15.2

all equity $71 $0.7 $117 -$8 $109

Dividend share 13% 62% 12% – 14%

gold funds saw six straight months of outflows, with a record $19.1 billion in the second quarter alone. the gold price tumbled 23% over the quarter as declining inflation expectations and the prospect of an end to quantitative easing sparked an investor exodus. Broad funds, silver and other commodities all recorded outflows.

etps remain big players in gold markets. the industry’s assets totalled $78.6 billion at the end of june, equivalent to 66 million troy ounces of gold. that compares with global gold production of 87 million troy ounces in 2012, according to the us geological survey. only the fed, germany’s Bundesbank, the International Monetary fund (IMf), and the central banks of france and Italy hold more of the precious metal, according to Bloomberg and IMf data.

global dividend etps, which focus on dividend-paying equities, held a total of $87 billion at the quarter’s end. this equalled 5.7% of total equity etp assets, compared with just 2.9% in 2010. see the chart on the bottom left. the number of dividend etps was 166 at the end of the second quarter–up 75% from 2010. this outpaced a 57% jump in fixed income etps and 37% overall industry growth.

us-focused funds dominate, with around 70% of the dividend total–dwarfing europe’s meager share of just 3.4%. Dividend etps have made up the bulk of the flows into european equity funds in 2013, although the totals are modest. see the table on the bottom right. emerging markets are relatively small players in the dividend etp world–but attracted net inflows in 2013 even as the overall category bled.

B l a c k R o c k I n v e s t m e n t I n s t I t u t e [ 5 ]

BIL

LIO

NS

YIEL

D

2010 2011 2012 2013

EmergingDeveloped

4%

3

2

1

0

-0.5

$4

3

2

1

0

-0.5

US 10-Year Treasury

US Fiscal Cliff Jitters

Sources: BlackRock and Thomson Reuters. Data as of 28 June 2013.

BonD alteRnatIves Dividend etp Flows and us 10-Year Bond Yields, 2010–2013

Source: BlackRock. Data as of 28 June 2013.

pReluDe to summeR Blues?monthly Dividend etp Flows by Region, 2012–2013

7/12 8/12 9/12 10/12 11/12 12/12 1/13 2/13 3/13 4/13 5/13 6/13 assets ($ mn)

us & canada1,099 727 369 632 -189 -562 1,889 619 2,071 2,718 1,677 476 64,336

europe–regional -15 25 4 -76 -24 21 65 87 7 21 39 52 1,655

germany 26 0 15 -24 24 14 20 3 4 27 7 -5 641

uK -3 -14 -31 16 15 22 61 18 3 12 10 19 951

total europe 8 11 -12 -85 15 57 147 108 14 59 56 66 3,247

asia pacific–regional 7 40 8 84 110 -12 -48 22 48 47 25 -24 802

australia 0 33 24 13 19 44 30 21 39 22 27 42 521

japan 9 2 -8 13 25 15 -28 24 162 70 61 8 697

asia pacific total 16 74 23 111 154 33 -46 67 250 140 114 48 2,082

global Broad 31 41 71 149 61 106 145 155 147 163 1,367 97 3,745

global Broad ex us 89 106 188 134 71 146 221 204 236 184 256 1 5,516

Developed market total 1,244 958 639 941 111 -220 2,355 1,152 2,717 3,264 3,471 688 78,926

emerging markets 137 226 285 242 181 159 574 389 262 163 209 -11 8,077

total 1,381 1,184 923 1,183 292 -61 2,928 1,541 2,980 3,427 3,680 677 87,003

FIXED InComE suBstItutEsflows into dividend etps, which tend to be treated as bond substitutes by many investors, can be heavily influenced by government and monetary policies. the sector’s outflows in November and December of 2012 illustrate the point. fears were growing about the us ‘fiscal cliff’–and the prospect of higher dividend taxes for wealthy us investors. see the table below and the chart on the right.

the world (and dividend investors) survived the cliff. Inflows resumed in 2013 after a mild increase in dividend taxes for the wealthy. Net purchases slowed down again in june. the reason? fed chairman Ben Bernanke’s signal that the central bank may ‘taper’ its bond purchases led to a spike in interest rates. this triggered outflows from utilities, property equities, preferred stock and other crowded income plays. Dividend funds actually still managed net inflows of $677 million in june.

strong flows into dividend etps over the past three years have roughly tracked the decline in us treasury yields to a record low of 1.44% in 2012. It is not a perfect relationship, but big yield declines typically were followed by increasing inflows. similarly, backups in yields such as in the latter half of 2010, slowed flows (but did not kill them). see the chart on the right.

paltry bond yields have pushed investors into bond alternatives such as dividend etps. Bonds pay fixed coupons, but equities offer the prospect of rising dividend payments (as well as capital appreciation) as companies increase earnings–but with the risk of capital losses.

[ 6 ] D I v I D e n D D e l u G e

BIL

LIO

NS

2010 2011 2012 2013

$3

2

1

0

-2

-1

US Cyclicals

US Dividend

mIRRoR ImaGe?us etp Flows: Dividend vs. cyclicals, 2010–2013

Source: BlackRock. Data as of 28 June 2013. Notes: Cyclicals are US sector ETPs specialising in materials, consumer cyclicals, energy, industrials, technology and financials. The combined assets under management of this group stood at $101.5 billion on 28 June 28 2013, compared with $61 billion for US dividend ETPs. Data reflect 3-month averages.

DIV

IDEN

D Y

IELD

ETP ASSETS (BILLION)

0 5 10 15 $20

0-11-2

2-2.52.5-33-3.53.5-4

4-55-66-77-88+%

hunt FoR YIelDGlobal Dividend etps: Yield Distribution

Sources: BlackRock and Bloomberg. Data as of 28 June 2013. Note: Based on 133 dividend ETPs with available data.

BIL

LIO

NS

2010 2011 2012 2013

$4

3

2

1

0

-2

-1

Global Investment Grade

Global Dividend

BRotheRs In aRmsGlobal etp Flows: Dividend vs. Investment Grade, 2010–2013

Source: BlackRock. Data as of 28 June 2013. Note: Assets under management of global investment grade bond ETPs stood at $78 billion on 28 June 2013, compared with $87 billion for global dividend ETPs.

BonDIFICatIon oF EQuItIEsMoney flows into dividend etps tend to move inversely with those into etps specialising in cyclical sectors such as materials, energy and financials. see the chart on the bottom left. Dividend stocks are regarded as defensives, and typically outperform cyclicals in periods of sluggish economic growth.

today, many defensive stocks (including dividend payers such as utilities) are at historic peaks in profitability and valuation. at these lofty levels, defensives may not provide the downside protection investors have come to expect (this year’s selloffs in utilities and property securities attest to this). we recommend slowly shifting out of crowded income plays and into cyclicals, as detailed in Exit, Entry and Overshoot of june 2013.

record low yields have led to the bondification of the equity market. Investors are buying quality companies with predictable earnings and dividend income. the result: flows into dividend etps are closely tracking flows into global investment grade (Ig) bond funds. see the chart on the bottom right. perhaps counterintuitively, flows into Ig funds have been even more volatile than those into dividend funds. the sectors are similar in asset size, number of funds (121 Ig bond funds versus 166 dividend funds) and geographical focus (us securities dominate).

Dividend etps come in many flavours. the average dividend yield is 3.3% (weighted by assets under management), compared with 2.6% for the MscI world Index and 2.1% for the s&p 500. the averages mask significant variations. these stem from differing methodologies for selecting dividend stocks, benchmark indexes and regional focuses of funds. see the chart on the top right. yields range from 2.1% to 6.6% in the 14 largest dividend etps globally (accounting for around 75% of assets).

B l a c k R o c k I n v e s t m e n t I n s t I t u t e [ 7 ]

a poRtFolIo stapleGlobal Dividend etps: sector and country holdings

countRY shaRe countRY shaRe

united states 82% Russia 1.4%

canada 2% china 1.4%

taiwan 1.7% Brazil 1.1%

sectoRsetp sectoR

weIGhts

oveR/ unDeRweIGht

vs. mscI us

oveR/ unDeRweIGht

vs. mscI woRlD

staples 15.7% 6% 5%

Industrials 14.6% 4% 4%

Financials 13% -4% -8%

utilities 11.3% 8% 8%

energy 9.2% -1% -1%

Discretionary 9.2% -4% -3%

materials 8.2% 5% 3%

healthcare 7.8% -5% -4%

technology 6.1% -12% -6%

telecoms 4.9% 2% 1%

Sources: BlackRock, Thomson Reuters and MSCI. Data as of 28 June 2013. Note: Based on top 14 dividend ETPs, representing 75% of total dividend ETP assets.

not (all) the usual suspectsGlobal Dividend etps: top 25 holdings

companY

shaRe DIvIDenD

etps

weIGht In

s&p 500DIvIDenD

YIelD

5-YeaR DIvIDenD GRowth

Chevron 2.5% 1.6% 3.2% 9%

Procter & Gamble 2.1% 1.5% 3% 10%

mcDonald’s 2% 0.7% 3.1% 14%

Exxon mobil 1.9% 2.8% 2.7% 10%

Coca-Cola 1.8% 1.2% 2.7% 8%

PepsiCo 1.6% 0.9% 2.7% 8%

Wal-mart stores 1.6% 1.7% 2.4% 13%

at&t 1.5% 1.3% 5.1% 4%

abbott laboratories 1.2% 0.4% 1.6% 5%

Johnson & Johnson 1.2% 1.7% 3% 8%

3m 1.1% 0.5% 2.2% 4%

Emerson Electric 1% 0.3% 2.9% 8%

united technologies 1% 0.6% 2.2% 12%

General Dynamics 0.9% 0.2% 2.8% 12%

IBm 0.9% 1.4% 2% 17%

Philip morris 0.9% 1% 3.8% 15%

Kimberly-Clark 0.9% 0.3% 3.3% 7%

microsoft 0.8% 2% 2.7% 15%

occidental Petroleum 0.8% 0.5% 2.9% 18%

medtronic 0.8% 0.4% 2.1% na

Pitney Bowes 0.8% 0% 5.3% 3%

lorillard 0.7% 0.1% 4.8% 28%

Walgreen 0.7% 0.3% 2.4% 24%

lockheed martin 0.7% 0.2% 4.2% 23%

Pfizer 0.7% 1.4% 3.4% -5%

total/aVERaGE 30.1% 23% 3.1% 11%

Sources: BlackRock, Thomson Reuters and MSCI. Data as of 28 June 2013. Note: Based on top 14 dividend ETPs, representing 75% of total dividend ETP assets.

peek under the hood, and the composition of dividend etps looks quite different from broad equity indexes. staples, industrials, financials and utilities are among the heaviest weighted sectors. the biggest differences with standard indexes are in technology and utilities holdings. see the chart above. even these sector averages mask an incredible variety of weightings between different etps. for example, the weight of financials in the top 14 dividend etps varies from zero to 52.6%. utilities exposure ranges from 1.2% to 30.4%.

why such huge variation between funds? the answer: there is no single benchmark. some funds focus on companies that have a long history (think decades) of consistently increasing dividends. this rules out technology companies such as Microsoft (first dividend in 2003) or apple (recently announced its first dividend since 1995). other funds focus on higher-than-average dividend payers–while adding ‘smart rules’ to screen out companies likely to halt dividend payments in the near term. others still concentrate on dividend stocks in certain market segments such as small caps–or regions such as emerging markets.

the top 14 dividend etps hold more than 1,400 different equities. the top 25 companies held by dividend etps account for around 30% of total holdings. see the table on the bottom right. the top 50 stocks account for 44% of holdings, while the top 100 make up 62%.

stock concentration varies greatly across industry sectors. for example, the top five stocks in the utilities sector make up just 17.5% of total utilities holdings across dividend etps.the top five energy stocks, by contrast, make up 65% of that sector’s assets, thanks to the high weight of behemoth dividend payers such as chevron and exxon Mobil. this is a similar story to emerging market etps, where stock concentration tends to be high in many sectors. see Emerging Equity Exposed for details.

This paper is part of a series prepared by the BlackRock Investment Institute and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 2013 and may change as subsequent conditions vary. The information and opinions contained in this paper are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents.

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