BlackRock: Global ETP Landscape and European ETP-Trends October 2017

Global ETP industry year-to-date flows crossed $500bn in October ….

Patrick Mattar, from the capital markets team at iShares

Global ETPs gathered $58.5bn in October, propelling year-to-date industry flows to $517.1bn, eclipsing last year’s record full-year total and led this month by U.S., broad global and broad emerging markets (EM) equity exposures

U.S. equities drew in $30.5bn driven by a rebound in large caps and faster flows to small-caps amid strong earnings reports and renewed optimism for tax reform

Broad global equity exposures brought in $12.7bn as global risk assets rallied on the Japanese election outcome and prospects for more central bank stimulus in Europe

Broad EM equities maintained momentum, gathering $4.6bn this month, focused in the week leading up to China’s Communist Party Congress 

Monthly net flow into EMEA-listed ETPs picks up to $7.8B

EMEA-listed ETPs gathered $7.8B in October, up from $6.9B in September. Net inflows across asset classes hit $81B YTD – already beating the previous calendar-year record set in 2015.

Equity ETPs dominated again with $6.3B of the inflow. Fixed income ETPs gathered $1.1B, a small uptick from September’s meagre $800m inflow.

Commodity funds listed in EMEA had their first month of inflows since July.

Key themes this month:

1 DM’s broad shoulders

October was the biggest-ever month of inflows (+$2.4B) to EMEAlisted broad developed equity ETPs, only the second time ever that the monthly inflow has been over $2B.

Flows to broad DM equities have spiked in the fourth quarter in recent times – four of the last five years have had greater inflows in Q4 than any other quarter, evidence perhaps of investors returning to benchmark allocations as the year draws to a close.

Investors in US-listed ETPs also chose broad developed equities this year, albeit through developed ex-US exposures such as MSCI EAFE. In 2017 so far, these US-listed funds have added a staggering $84B – more than the inflows across all asset classes in the EMEA-listed ETP industry (+$81B).

2 European equity staycation

October was another positive month for EMEA-listed European equity ETPs. They have now had 14 consecutive months of inflows – continuing their longest run on record.

While European investors continue to invest in European equities, US investor appetite seems to have cooled. $1.3B has been withdrawn from US-listed European equity ETPs over the last three months. Recent US dollar gains might have encouraged US investors to return to domestic, USD-earning equities.

European business confidence, as measured by manufacturing PMIs, is at an 80-month high. With a weakening euro likely to benefit export-heavy European companies, we may see US investors return, though they may choose to do so through currency-hedged vehicles.

3 Making the grade

October was good for investment grade (IG) fixed income ETPs, which added $1.3B – the majority in US dollar ($) IG ETPs (+$0.8B).

While equity ETP flows often show home country bias, this is less of a driver in fixed income. This year $6.2B has been added to EMEA-listed $ credit ETPs vs. $2.9B for euro (€) credit ETPs.

€IG funds have had a bumpy year (see Where credit’s due) but have broadly had inflows since the French election in May. $IG ETPs, however, have barely paused for breath. Though the political landscape has been volatile on both sides of the Atlantic, the higher yields on $IG relative to most DM equivalents have attracted yield-hungry international investors.

4 EMD of the road

October was the first month of the year in which there were outflows from emerging market debt (EMD) ETPs, which lost $0.57B. This ended nine straight months of inflows that had added $9B to local and hard-currency exposures.

The majority (-$0.4B) of the outflows in October were from local-currency products, which had been ahead of their hardcurrency equivalents by $0.5B this year, leaving them just $0.2B ahead.

Despite improving economic conditions, earnings growth and investor sentiment, local currency weakness vs. USD has dragged down returns and appears to have spooked some investors.

5 Sustainable breakthrough

2017 has been a breakthrough year for EMEA-listed sustainable ETFs. $2.3B has been added, eclipsing the previous best calendar-year inflow of $890M. The average monthly flow into these funds between 2010 and the start of this year was $30m; in 2017 the monthly average is $230m.

There appears to be a growing acceptance from investors that indexed products can provide exposure to sustainable investments without compromising returns. The MSCI Europe SRI index has outperformed MSCI Europe by 1.25% YTD (source: Bloomberg at 31/10/2017).

Sustainable index investing is one area where the US lags Europe. Changing end investor attitudes, alongside greater regulatory focus on ESG in certain European countries, could lie behind this difference.

Source: ETFWorld

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