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What ETFs Did Investors Buy in 2016?

Eurozone equity ETFs were also at the top of investor’s preferences in the fourth quarter. But for the year as whole, these market exposures registered net outflows

Jose Garcia-Zarate 12 January, 2017 | 2:20PM

The European exchange-traded-fund market attracted €11.5 billion in net new money in the fourth quarter of 2016, bringing the grand total for the year to €47.9 billion. Assets under management increased to €546 billion from €466 billion in 2015.

European Equities Most Popular Asset Class

Equity ETFs saw a turnaround in fortunes in the fourth quarter and closed 2016 with annual net inflows of €13.6 billion and assets under management up to €365 billion from €319 billion in 2015.

The rotation to equities – mostly developed markets – gathered speed after Trump’s victory in the US election. US equity holdings were particularly favoured, with investors taking a broad positive view about the incoming US President’s economic views.

Broad European and Eurozone large equity ETFs were also at the top of investor’s preferences in the fourth quarter. This was a remarkable change from a rather negative third quarter when valuations were dragged down by the troubles in the German and Italian banking sectors. However, for the year as whole, these market exposures registered net outflows.

Emerging market equity ETFs were on the back foot in the fourth quarter on a combination of a strengthening USD and concerns that Trump’s protectionist views mean trouble for these countries. The outflows in Q4 only dented what was a good 2016 for this market exposure – close to €5.3 billion of net new money was placed in global emerging equity ETFs – but clearly leave a question mark on sentiment into 2017.

Fixed income ETFs saw net outflows of €2.5 billion in the fourth quarter as “risk-on” sentiment and higher US interest rates took their toll. Despite this, fixed income was a success story for the European ETF industry in 2016, pulling in €20.6 billion in net new money and increasing its market share to 24.1% from 22.6% in 2015.

Eurozone government debt remained firmly at the bottom of investors’ preferences. By contrast, EUR-denominated corporate bond ETFs – both investment grade and high yield – were the top-money gatherers of 2016, cashing in around €8 billion of net inflows in aggregate over the year.

The prospects for fixed income into 2017 have turned sour, as investors worry about the pull factor of higher US interest rates in global bond markets. Irrespective, ETFs have made great strides in being accepted as investment vehicles for fixed income exposures. There remain concerns and an ongoing need for education, most notably around the issue of ETF trading and liquidity. However, all ETF providers concur in identifying fixed income as one of their key growth areas in the future.

Commodity ETCs and ETFs experienced EUR 0.9 billion in net outflows in the fourth quarter. The improving sentiment around equities lessened the need to seek the safety of the likes of gold. However, the positive run in the previous three quarters ensured that commodities closed 2016 with over €12 billion of net new money into the asset class. Assets under management rose strongly to €43 billion from €28 billion at the end of 2015, largely on the rebound of gold prices out to October 2016, as well as on the bottoming out of other commodity prices.    

Strategic Beta Flows

Strategic beta – commonly known as smart beta – ETFs attracted over €1.3 billion of net inflows in the fourth quarter, down from €2.4 billion in the previous period as investors pulled out of positions in risk-oriented strategic beta ETFs – for example, minimum volatility.

In 2016, strategic-beta ETFs netted in €9 billion of new money, up from €7 billion in 2015. More importantly, net inflows into strategic-beta represented 19% of the total money flowing into ETFs during 2016. This was strongly up from 10% in 2015 and clearly signalled that ETF investors are increasingly looking beyond tried and tested plain vanilla market exposures.

Assets under management in strategic-beta ETFs totalled just over €43 billion at the end of 2016, up from €31 billion a year earlier. Their market share has gone up to 8% from 6.6% in 2015.

Who was the Most Popular ETF Provider?

iShares was the top money-gathered of 2016, attracting net inflows of €26.4 billion. iShares’ market share has remained stable around 46% for the past three years and there seems to be little prospect of this situation changing substantially anytime soon.

By contrast, the fight amongst the other providers has become quite interesting. Db x-trackers hanged on to second position in 2016. However, there is no disguising that this was a rather bad year for this provider. Investors pulled out €5.3 billion and its market share dropped to 9.8% from 11.9% in 2015.

Lyxor remains the third largest ETF provider in Europe and closed the gap in the fight for second position. Interestingly, however, despite moderate annual inflows and an increase in assets, its market share also dipped slightly relative to 2015.

State Street, Amundi, Vanguard and UBS, did much better in attracting investors’ attention and have gained market share at the expense of both Lyxor and, above all, db x-trackers.

There is no single common reason explaining these providers’ good results in 2016. Each seems to have succeeded on a combination of specific drivers such as State Street’s timely build-up of a physically-replicated fixed income ETF range, the enduring appeal of Vanguard’s flagship S&P 500 ETF, or UBS’s leading moves in the field of currency-hedged and ESG-themed ETFs.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Jose Garcia-Zarate

Jose Garcia-Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe