BlackRock: Global ETP Landscape and European ETP- Trends 2017

Global ETPs Set a New Flows Record in 2017, Posting Another Year of Double Digit Organic Growth….

Patrick Mattar, from the capital markets team at iShares

Global ETP flows of $633.0bn represented 18% organic growth –the fastest growth since 2009 –and exceeded last year’s flow record of $378.4bn by 67%, fueled by record flows across equity and fixed income categories

Global ETP Highlights

Global ETPs gathered $62.1bn in December to drive 2017 flows to a new record of $633.0bn, exceeding the last year’s flow record of $378.4bn by 67% (see “Spotlight On Annual ETP Flows” below). The industry achieved annual organic growth of 18% –the best growth since 2009 –reflecting record flows across equity and fixed income categories.

U.S. equity ETPs brought in a new annual record $196.1bn including large-capswith $97.2bn and small-capswith $15.8bn, fueled by tax reform prospects and stronger economic growth. These trends also drove a rotation into cyclical sector funds which added $22.4bn, led by financialswith $9.3bn and technologywith $6.9bn.

Broaddeveloped markets (DM) equitiescollected $116.2bn in 2017, far exceeding the previous record of $66.5bn from 2015. EAFEfunds made up $54.5bn of the total –also a new record –amid favorable valuations in Japan and Europe and persistent positive economic growth. Japanequities also marked a new high of $53.9bn, chiefly driven by purchases by the Bank of Japan.

Broad emergingmarkets (EM) equity funds also took in a new annual record $45.4bn, beating the 2010 record of $31.5bn, with durable flows throughout the year bolstered by stronger commodity prices and a weaker U.S. dollar.

Fixed income flows of $156.2bn surpassed 2016’s record by more than a third, representing organic growth of 26%, a fourth consecutive year where organic growth was greater than 20%. Flows were consistent throughout the year with new full-year flow records in investment grade corporateswith $49.7bn, EM debtwith $16.1bn and U.S. Treasurieswith $18.2bn.

ETP flows 2017 in review

Top five themes of 2017…

Spectacular rebound for Europe

European equities had an annus horribilis in 2016, with 9 consecutive months of outflows between January and September. Investors withdrew $35B over the year, the majority of which ($26B) came from US-listed ETPs, although EMEA-listed funds also had outflows of $10B.

There was a spectacular revival for European equities in 2017, as both European and US investors piled back in, adding $40B over the year.

This inflow to US-listed products coincides with a rally in the EUR/USD cross rate. This mimics a trend seen throughout the year: as the dollar weakens versus the euro, US investors look to Europe. Flows have broadly moved sideways during periods of dollar strength and have grown when the dollar has weakened.

Golden opportunities

December was a quiet month for gold ETPs, with just over $100m added across all domiciles. This is the lightest month since July which was one of only two months of outflows this year.

The enduring theme of the year within gold ETPs was the divergence in flow patterns between US-listed and EMEA-listed gold ETPs. This was yet again the case in December as there were moderate outflows from US-listed funds while there were inflows to EMEA-listed equivalents.

US-listed gold ETP flows have appeared relatively closely linked to the gold price this year, with investors seemingly reacting tactically to price moves in either direction (see the chart above). In Europe, on the other hand, investors have added fairly consistently throughout the year. There has only been one month of outflows this year from EMEA-listed ETPs (in September) suggesting that gold ETPs have been playing a more strategic role in European portfolios than US ones this year.

EM assets in vogue

December was the strongest month of the year for Emerging Markets equity ETPs, which added $7.4B. There were also inflows to EM debt ETPs for the first time since September.

This caps a stellar year for EM funds across the global ETP landscape and takes the combined inflow total for EM assets to $67.9B, just $0.2B behind the record EM inflow of $68.1B in 2012.

EM equity ETPs had a tricky 3-year period of outflows between 2013-2015, when $45.1B was withdrawn. Flow momentum has been building over 2016 and 2017 with $22.6B and $47.0B added in each year respectively. Domestic demand and local political situations appear relatively benign. The EM growth picture thus seems largely healthy, posing few threats to these positive flows continuing into 2018.

Developed and diversified

Continuing a trend highlighted throughout Q4, December was another strong inflow month for EMEA-listed broad developed equity ETPs.

This means the dynamic we’ve seen in four of the last five years – more inflows in Q4 than any other quarter – looks set to continue for broad developed ETPs. It appears that investors are moving portfolios closer to benchmark weights towards the end of the year using broad developed ETFs.

A theme that has endured throughout 2017 is investors in US-listed ETPs allocating to broad developed equities. In 2017 so far, these US-listed funds have added a staggering $100B, a larger inflow than the whole of the European ETP industry across all asset classes over the same period.

Investing for good

 2017 was nothing short of a breakthrough year for sustainable ETFs. There has been a total $5.2B added globally, the previous best calendar year inflow was $2.4B.

The average monthly flow into these funds between 2010 and the start of this year was $30m, in 2017 the average is $230m.

Traditionally an area accessed through actively managed products, these flow figures suggest that investors are coming round to indexed products. The old assumption that accessing sustainable investments in an indexed wrapper meant lower returns being disproved by modern passive fund construction.

This is one area where the US-listed ETP landscape lags the EMEA-listed one, changing end investor attitudes and guidelines suggesting ESG usage from certain regulators in European countries may be contributing to this trend.

Source: ETFWorld

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