It has been all go in the ETF industry this year and the third quarter was no different as the ETF market continues its monumental rise. Or has it peaked?
It was the period of ‘firsts’ as several companies made leaps into new industries and markets. Bloomberg made a foray into the equity index market for the first time with the launch of its US equity index suite. The index provider has made a dominant footprint in the fixed income space and responded to investor demand to offer a more comprehensive range.
Another first was for Goldman Sachs Asset Management which finally entered the European ETF market with the launch of its actively managed US equity ETF. This is the first product of a range of ETFs that GSAM is planning on launching over the next six months.
While some were only just starting to develop within the industry, some individuals were leaving. In particular, the experienced David Abner, head of WisdomTree Europe, left the ETF issuer in July after spending 11 years with the company. Abner has been replaced by Alexis Marinof, the group's chief operating officer for Europe, who joined the company in 2017.
The summer was a busy period for issuers and their recruitment teams as a significant number of individuals pursued new opportunities elsewhere.
One ETF issuer which has dramatically expanded its team is Amundi. It has been the centre point of a number of high profile moves such as Pav Sharma, senior sales specialist, joining from WisdomTree, Liz Wright, senior index, ETF and smart beta sales, from Vanguard, and three new additions to its German offices.
In tandem with European asset managers expanding their ETF teams as the investment vehicle grows in popularity, the industry has been scrutinised for the potential risks it might be offering.
The European Systemic Risk Board (ESRB) said ETFs have the potential to cause systemic risk to the global financial system. This is because of the significant spike in popularity ETFs have had among investors as well as the rise of complex products such as leveraged and inverse ETFs and offering investors access to more illiquid parts of the market via the ETF wrapper.
Market maker Jane Street Group responded to this claim by ESRB by saying the concerns were unfounded and ETFs would continue trading even if liquidity does become strained.
In addition to the concerns raised by ESRB, Michael Burry who famously bet against the subprime crisis has warned that there is a bubble in passive investing. Burry believes the market is becoming too concentrated as a result of passive investments, such as ETFs, pouring money into large cap stocks.
It did not help matters when the ETF market suffered significantly large outflows in August and September amid volatile macroeconomic and global political events. In fact, European-listed ETFs suffered negative monthly flows in August for the first time since February 2016.
Fixed income and gold ETFs attracted the majority of flows in the first half of 2019 amid political uncertainty. However, this trend has started to fade as the likelihood of bond yields recovering will drive down the price of gold, according to Capital Economics.
Two factors which have impacted the ETF industry massively through performance and asset allocation are Brexit and the global trade war. Towards the end of September, it has been speculated Donald Trump is likely to resolve its issues with China.
As for Brexit, 31 October remains as the final deadline for the UK to leave the European Union whether a deal is negotiated or not. How markets are going to respond to the two events is impossible to predict and therefore, Q4 is going to be a busy period for all market participants.