Global ETP flows resilient in February despite outflows for U.S. equities…
Patrick Mattar, from the capital markets team at iShares
Global ETP inflows slowed to $6.8bn in February amid a continued rise in U.S. interest rates and a correction for the S&P 500
Funds with exposure to non-U.S. equities maintained momentum despite the global selloff by bringing in $24.2bn, led by Japan with $7.1bn, broad EM with $3.3bn and EAFE with $2.4bn
Fixed income generated $3.4bn, with healthy inflows for less risky categories such as U.S. Treasuries, U.S. broad market debt and TIPS offset by outflows for investment grade corporate, high yield corporate and EM debt
Redemptions for U.S. equities reached ($23.3bn), though this followed cumulative inflows of $122.5bn over the prior four months
Monthly net flows into EMEA-listed ETPs remained positive at $7.7B, despite the February equity market correction.
In February, EMEA-listed ETPs pulled back from January’s record inflows, but still attracted $7.7B despite a market correction.
Equity flows were positive (+$6.3B), as investors appeared to buy the dip. Meanwhile commodities had outflows of $378M, versus inflows of $799M in January.
Fixed income gathered $1.2B, particularly in the second half of the month, as investors allocated to government bond exposures.
Key themes this month:
Volatility returned to markets in February, but EMEA-listed equity ETPs continued gathering assets. February inflows lagged record inflows in January, but they were still almost twice as large as December 2017 flows.
European equities were the most popular equity exposure, at +$3.4B. Investor preference for European equities is not new though: European equity inflows have beaten US equity inflows in all but two of the last six months.
This persistent equity demand came alongside strong earnings growth across regions, fuelled by a synchronised global economic expansion.
Factoring in growth
Value has continued to lead factor ETP inflows in 2018, attracting $0.6B of assets YTD. Value’s share of the total factor flow has been rising every year since 2015, reaching 78% in 2017 and 130% so far in 2018. Inflows into momentum ETPs were positive too; in February, the exposure gathered $0.06B – the largest inflow since October 2017.
At the other end of the spectrum, minimum-volatility exposures lost $0.25B in February – the biggest monthly outflow since February 2017. Value and momentum factors could benefit from the global economic expansion. This could explain investor preference for these factors vs. more defensive minimum-volatility exposures.
Growth-focused thematic funds were also in demand. These lagged January inflows, but still gathered $850m of global assets in February, $480 of which came from EMEA.
Sectors R US
Looking at US sectors, cyclicals including financials and tech have gathered the most inflows YTD. Such allocation could be helped by US tax cuts and a bigger than expected fiscal spending package.
Since December 2017, when the US Tax Reform Bill was agreed, US financials have gathered $1.4B, $888M of which has been added YTD.
Q1 2018 is on track to be the largest quarter ever for US tech, based on the size of the inflows that have gone in so far. January and February have been the second and third largest months for US tech flows since records began.
EMD still the key?
February was a risk-off month for fixed income flows. EMD inflows slowed down from January levels, while high yield had outflows of $1.5B in February 2018, a record figure. The majority of inflows went into rates (see Rate that below).
EMD fared better than HY, with net flows remaining positive at $0.2B. The exposure had its first outflow week of the year in February, but buying returned in the latter half of the month.
The February outflow from HY (-$1.5B) was the largest on record by some margin: the next largest outflow, in December 2017, was three times smaller at $0.5B. Investors’ preference for EMD exposures over HY – also observed in 2017 EMEA ETP flows – could be explained by relatively lower volatility for a comparable level of yield. There could also be more structural adoption of EMD as an asset class, helped by improving fundamentals and credibility of EMD issuers.
Inflows into rates ETPs accelerated in February potentially driven by a safe haven search amid weak equity sentiment. Investors could also be taking advantage of tactical opportunities in the rates space.
Rates ETPs gained $1.98B in February – the largest monthly inflow since August 2014. This contrasts with $0.42B of outflows in January.
Meanwhile gold, another exposure often used a safe haven, had the largest month of selling since December 2016 (February outflows from gold ETPs equalled $0.94B). Gold ETPs have had six consecutive weeks of outflows this year, the first time this has happened since December 2016.