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Supplements » ETF Report March 2022

ETFs roundtable: ESG has wound itself into ETFs

Funds Europe – Have, or should, ETF flow patterns change substantially in response to the higher inflationary environment that investors now find themselves in?

Fuhr – Through to the end of January, European investors have continued to put money into equity exposure. In January, $25 billion of net new money was going into equities, while fixed income was taking in just about $3 billion and commodities $1.5 billion.

So, I would say that for many investors, although there is the concern around inflation, I think that the other thing they’ve been looking at is an expectation that things are getting better as Covid-19 fears recede and restrictions are lifted.

Last year, though, there was about $7.6 billion of net flows into inflation-linked fixed income exposures, and we also have seen more recently money going into gold, probably as an inflation hedge. I think that gold is now competing with cryptocurrencies for that uncorrelated, safe-haven status.

ETFs have proved to be a very good barometer of investor sentiment.

Cripps – ETPs – and I do say ETPs here and not ETFs quite specifically – have proved extremely good vehicles for inflation-conscious allocators because of the depth of choice that the market offers and allows a very specific asset-class or factor exposure.

The inflation-link trade characterised 2021. It was huge, with over $5 billion of net inflows – and it was highly successful for clients that were able to get on board with this before market expectations changed. Over the course of the year, global inflation-linked government bond indices outperformed not just global government bond indices, but also certain global high yield indices.

The returns there were really outstanding, but in terms of the options you’ve got from the ETP market, you’ve also got relatively simple strategies that all client types can now access. For example, something as simple as a factor-rotation strategy; we’ve got a huge amount of sector ETFs available, meaning you can rotate out of cyclicals and into more defensive sectors like consumer staples, utilities or energy. The return to favour of ‘value’ as the factor of choice in this market is likely to result in increased factor ETF flows.

Increased flows into commodity exposures is perhaps one of the most traditional expectation for higher inflationary environments. Issuers with developed ETC platforms are likely to more able to capture inflation-hedging and risk-off trades.

Paquier – There are many case studies indeed. I’ve noticed that more clients are seeking to avoid negative outcomes in such an inflationary context. To do this, they may short or write options on ETFs. Others will focus on long market trends and typically will invest in equity ETFs when the inflationary pressure increases. The first week of February was, for example, the first week where European equity ETFs saw the most inflows of all market categories and asset classes.

Larger asset owners such as corporate clients who are uncertain of the future may choose to invest in ultra-short duration types of ETFs that offer risk management for cash, fitting their specific needs.

Investors will generally find the right solution to market configurations if an ETF provider has an offering that has breadth.

Odogwu – Some investors may be over-optimistic around the market returning to a pre-Covid inflationary environment in the medium term, and we think flows into TIPS [Treasury Inflation-Protected Securities] are going to come back in the near future. We also see gold coming back as an inflation hedge this year.

But I guess what’s been more interesting for us has been the factor play. Factors went out of fashion slightly for institutional investors up until the middle of last year when we saw a rotation to value, but this year as volatility has increased, we haven’t seen clients go risk-off, but rather they’ve rotated out of growth into quality and value exposures.