As the final figures of mutual fund and ETF flows for 2011 are being tallied, Lipper analyst Matthew Lemieux said Wednesday that despite good returns, investors prefer to remain out of the market. Plus, he added, they need to watch their purchases of the most popular ETFs due to extreme volume and volatility of these products.

“For the year 2011, the real theme we are talking about is how flows struggled year,” said Lemieux in a webcast. U.S. diversified equity fund out flows were $73 billion in Q4, though they posted 10.8% returns during the period.

“Even though we have seen good returns, some investors are not convinced and continue to pull out of this group,” he explains. “About $161 billion in 2011 was pulled out of this group of funds.”

In the fourth quarter, for instance, close to $57 billion came into the overall conventional mutual fund business, but such flows were most notable in money market funds. This was the only quarter to experience positive inflows last year, according to Lipper.

Another big story, says Lemieux, was the level of positive flows into taxable fixed income, which drew $67 billion in Q4 and $166 billion for the full year. Money markets had inflows of $72 billion for Q4, though they ended 2011 with overall outflows of $120 billion.

ETF Dynamics

“This is a very different story,” said Lemieux. “The volume and size of flows points to more trades in the short term, especially institutional trades.”

While mutual funds are more of a thermometer for retail investors, ETFs are a strong indicator of institutional sentiment.

“They are such a different story with much more volatility,” the Lipper analyst explained, noting that there were inflows of about $32 billion into ETFs in Q4.

“And what we see with the SPDR S&P 500 ETF (SPY) is the real story. This product especially, and other big ETFs, are used by institutions for shorter-term plays.”

Flows in and out of the SPY and iShares MSCI Emerging Markets ETF (EEM) are much “more volatile and change more rapidly than what we see in the mutual fund space…,” stressed the Lipper analyst.

The yearly cumulative ETF flow data, shown about 5 minutes and 25 seconds into the webcast, reveals that the SPY fluctuated between $10 billion in cumulative outflows at certain points of the year and up to $4 billion in inflows at other times. EEM had about $10 billion cumulative outflows in 2011.

“This chart really shows how fast the cumulative flow of these products can change,” Lemieux concluded.