Industry Updates

Disaster averted! ETFs rebound in July

Scott Longley

a pumpkin carved with a face

The ETF sector in the US enjoyed a rebound in investor enthusiasm in July when the market returned to a position of seeing fund inflows in July after a three-month run of outflows.

A total of $28bn was attracted to ETFs in the month pushing the year-to-date inflows to $153.5bn. Equity ETFs saw $18.7bn on inflows while fixed income gathered in $10.7bn of investor assets.

In Europe, meanwhile, BlackRock iShares was celebrating its own milestone as it was announced that its flagship iShares Core S&P 500 UCITS ETF had managed to break the $30bn in asset under management barrier, the first European ETF to hit such a figure.

While the US ETF market has returned to growth, it remains unlikely that the total annual inflow figure from 2017 of $466bn will be matched.

Reacting to the news of the return to inflows in the US, Matthew Bartolini, head of SPDR Americas research for State Street Global Advisers (SSGA), suggested that 2018 to date could be characterised as a market where volatility had returned with a vengeance.

With it comes a "unprecedented" level of variability of ETF flows. "In 2017, as the VIX plumbed new lows and the market seemed destined for the stratosphere, the ETF industry saw inflows in every calendar month, with an average take of $38bn."

He added that the dispersion or range of monthly inflows was "just" $29bn, which was below the 20-year average of $32bn despite the US ETF asset base growing by 35 percent during the year.

"Thus far in 2018, the monthly flow dispersion is $81bn, already 15% higher than any previous calendar year, with five months to go."

Pointing to the "mixed bag" of monthly figures for the year to date, Bartolini pointed out that should there be another month of outflows ta any point in the remaining five months of 2018, it would be the first time in 15 years that there had been four months of outflows in a calendar year.

He went on to suggest that political and economic instability - particularly President Trump's threats of pursuing trade wars - was behind the current state of flux suggesting that "some issues seem too troubling to ignore." "July offered us our first glance at the effects of some of the President's policies. Tariffs are real, in effect right now and already changing the bottom line for companies and investors."

Bartolini predicted continued flow volatility in the months to come. "I wouldn't be surprised if we continue to see greater than normal ETF flows, both in and out. Importantly, however, such dramatic fluctuations should not be viewed as a harbinger of doom."

Get the message

Back in Europe, Stephen Cohen, head of iShares EMEA at BlackRock, said the fact that the new milestone for an ETF in Europe has been reached was further proof that the message with regard to passive investing and low-cost ETFs was hitting home with the investment public.

"Investors are demanding smarter portfolios that deliver value for money, and this milestone shows that investors are increasingly using ETFs at the heart of their portfolios," he said.

"The S&P is outperforming other developed and emerging market equities this year, while strong earnings and economic growth in the US are driving positive sentiment towards the exposure. We expect more and more investors to express their outlook using our fund."

A recent piece of analysis from BlackRock iShares suggested that global ETF assets under management would total $12trn within five years compared to the current total of circa $4.7trn.

The analysis identified four factors which are likely to provide the impetus for the next leg of the ETF journey. First, ETF investors are active investors, using ETFs to achieve outcomes that differ from the broad market.

Second, investors are now much more sensitive to cost and ETFs "dovetail" with these concerns. Third, there is a transformation under way of the financial advisory sector both in the US and Europe with a move towards fee-based services where lowering costs is now the focus. And finally, an evolution in the way that bonds are traded favours ETFs because of the ease of market access that they offer.

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