FUND FLOWS: Unstoppable force

The ETF industry looks set for a record year of inflows, despite market volatility in global equities. David Stevenson looks at which parts of the ETF industry are benefiting most from investor sentiment.

Flying in the face of the turbulence experienced by global equity markets in the third quarter (Q3) of this year, the European ETF market showed its durability during the period, recording net inflows of around €17.7 billion in net new money, according to Morningstar.

In fact, by the end of Q3, total net new money into European ETFs already amounted to €52.8 billion, €1.8 billion above the record high of €51 billion hit in 2008. 

Jose Garcia-Zarate, a senior ETF analyst at Morningstar, goes so far as to say that it would take a sustained period of outflows in the final quarter to stop this year being a record for the European ETF industry.

“It’s a Draghi rally,” says Garcia-Zarate, in reference to the impact of the European Central Bank’s policy of quantitative easing (QE). In Q1 of this year, €30 billion of new money entered European ETFs as QE began. 

Even flows into single-country indices such as the German Dax have remained resilient, despite some serious headwinds. After the Volkswagen scandal, ETFs tracking the Dax did not see outflows – indeed, the money kept pouring in.

“One of the big struggles was Volkwagen – it’s surprising that German ETFs had inflows after that. People were looking for bargains,” says Detlef Glow, head of Europe, Middle East and Africa research for financial information firm Lipper.

However, figures from Lipper also illustrate that the seemingly unassailable march of ETFs has not been without a few stumbles. The firm notes that in September, total assets under management in the European ETF industry declined by €4.7 billion to €428 billion. It attributed the decline to the performance of underlying markets taking €7.2 billion off the total assets under management (AUM), although the reduction was partially offset by net sales of €2.4 billion.

Given the global equity market ructions during late summer and September, Glow finds it “surprising” that equity funds enjoyed the highest inflows of any ETF asset class during the month (€2 billion). This was followed by bond funds with positive inflows of €400 million; ‘other’ products had €200 million while real estate and money-market products recorded modest inflows of €10 million and €4 million respectively.

In the face of global macroeconomic forces, other classes were not so fortunate. ETFs following commodities – especially gold – are a prime example, according to Garcia-Zarate. “A lot of the reasons people went into gold are not there. Inflation is non-existent and risks of the collapse of Eurozone are no longer there,” he says.

Morningstar found that the downside to commodity prices led investors to liquidate close to €0.9 billion in positions in exchange-traded commodities (ETCs) and ETFs providing exposure to the asset class
during Q3.


At the end of the Q3, flows illustrate that European ETF investors showed a preference for developed market equities. While Eurozone large-cap leads the pack with €4.5 billion in new net inflows, there is still an appetite for US large-cap equity, with €2.6 billion of inflows.

“It’s not that people are selling out of the US into Europe. The investor community sees more upside to the European equities market than the US market, which has been rallying for a while,” says Garcia-Zarate.

Investors focus had moved from the US recovery and the S&P 500 or MSCI USA – a feature of 2014 – towards Euro Stoxx 50 and the Eurozone itself. Glow of Lipper also notices this trend of investors seeking better valuations in Europe rather than the US.

According to Lipper’s figures, Japan was European equity ETF investors’ second-favourite choice in the first half of the year, enjoying inflows of €6 billion. But in Q3 it fell out of favour with European investors, who may have grown impatient with the failure of Abenomics to improve the Japanese economy. This, coupled with the proximity to a weakened China, has led to a reversal of fortunes for Japan. 

Garcia-Zarate says fixed income ETFs are doing fairly well, with around €17 billion invested in the year to Q3. He adds that there are two strands for investing in fixed income: those who are looking for yield, meaning high-yield or other corporate bond ETFs, and those using fixed income tactically to ride out volatility in equities markets. 

“The tactical ones should be short-term unless volatility becomes entrenched,” he says. 

The bulk of the inflows into standard government bond ETFs, particularly those providing exposure to the short end of the maturity spectrum, indicates that this is a strategic move to ride out the volatility in equity markets. Garcia-Zarate says he will not be surprised if a good number of those fixed income positions are unwound in Q4 if market volatility decreases.

Despite the record year that ETFs are set to enjoy, Glow points out that these products account for only 5% of total AUM in Europe. At €434 billion, ETFs trail the AUM of index funds, which stands at €491 billion. 

Comparing index funds to ETFs should be done on performance rather than price, says Glow. ETFs have a higher management fee, as the promoter of the product has to pay a fee to the index provider. He says that on a nine basis point ETF, more than half would go to the index provider. 

But costs are a consideration for investors and Vanguard’s unique structure (it is owned by its funds) means it can be extremely competitive on price compared to a bank or insurance company-owned asset manager.

“Everywhere where Vanguard go, they’re changing the distribution landscape. Because they are a non-profit organisation, with many different business models, they can come in with quality products at a low price and they promise to pass the economies of scale to customers. If the fund size increases, the management fees go down,” says Glow. 

However, according to figures from Lipper, Vanguard was the sixth-largest provider of ETFs in Europe in the first half of the year by AUM. The top spot went to iShares with €210.7 billion. It accounts for almost half of all ETF AUM in Europe.

©2015 funds europe



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