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ETF Sales Triple to Record High

The European exchange-traded fund market has got off to a stellar star in 2017, with record-high net inflows of €33.4 billion in the first quarter

Jose Garcia-Zarate 20 April, 2017 | 11:51AM

The European exchange-traded fund market has got off to a stellar star in 2017, with record-high net inflows of €33.4 billion in the first quarter, tripling the €11.1 billion registered in the closing three months of 2016. Assets under management at the end of the first quarter amounted to €601 billion, and were up 10.2% from €545.7 billion at the end of 2016.

US and European Equities Prove Popular

Equity ETFs were strongly favoured with €19.4 billion of net inflows. The distribution of quarterly net inflows by Morningstar Categories reveals that investors’ attitudes towards the global economy have improved considerably. In the top five money-gathering equity categories of the quarter we find a broad palette of exposures covering both developed and emerging markets.

Investors were happy to look through the political shenanigans of the newly installed Donald Trump administration and remain focused on the benefits of the promised fiscal policy-led expansion for the US economy. ETFs in the US large-cap blend equity category attracted close to €2.6 billion, while currency-hedged US equity ETFs netted in close to €1 billion.  The latter signalled how divergent monetary policy cycles in the US and Europe are adding a rising FX risk to the investment decision process.

Eurozone large-cap equity ETFs attracted €1.9 billion, further building on the solid inflows registered in the latter part of 2016. For all the talk of political risks weighing on the economic outlook, the fact remains that the eurozone recovery is gathering speed, and equity indices – both broad eurozone and single country – have returned 6%-7% on average in the first quarter and 20% in the past 12 months.

Emerging Market Bonds Return to Favour

Net inflows into fixed income ETFs amounted to €7.2 billion, more than reversing the €3 billion in outflows in the closing quarter of 2016.

Investors rekindled their interest in emerging-market bonds after a shaky end to 2016 when sentiment was hit by the anti-globalisation rhetoric espoused by the then President-elect Trump.  Whether USD or local currency-denominated, ETFs providing exposure to emerging market debt have attracted healthy inflows in the first quarter.

ETFs providing exposure to the US corporate bonds – including floating rate notes and interest rate hedged products – and US TIPS market also did well, netting in €1.2 and €0.9 billion respectively. 

By contrast, EUR-denominated broad maturity fixed income exposures – government, corporate and high yield – were at the bottom of investors’ preferences in the first quarter. However, ETFs providing exposure to short-dated EUR-denominated bonds sold well. This indicates an interest for duration-shortening strategies underpinned on expectations that the ECB will have to tone down its dovish rhetoric.

Commodities, Gold and Strategic Beta

Commodity ETCs and ETFs pulled in €4.9 billion of net new money in the first quarter, more than reversing the €0.9 billion of outflows experienced in the previous period. 

As usual for this asset class, the bulk of inflows was directed at products providing exposure to gold. However, a special mention goes to the Source Bloomberg Commodity ETF, a broad-basket commodity fund tracking the Bloomberg Commodity Total Return index, formerly known as the DJ-UBSCI, that attracted inflows of €1.1 billion; mostly all at launch in January. Its popularity can be primarily attributed to its low ongoing charge, which at 0.19% is almost half the fee charged by the cheapest rival tracking the same index.

Strategic-beta – also known as smart beta – ETFs attracted €3.1 billion of net new money in the first quarter, significantly up from €1.2 billion in the previous period.

Investment trends during the first quarter broadly mirrored those of the second half of 2016. Risk-oriented strategies – for example, minimum volatility and minimum variance – remained on the back foot. By contrast, return-oriented strategies netted in €2.9 billion of net new money to further cement their hold on the strategic beta ETF market in Europe, with a market share of 73.5%.

Which is the Most Popular Provider?

In terms of providers, iShares topped the quarterly flows league in the first quarter, netting in €9.7 billion. However, the shift in investors’ preferences away from fixed income – where iShares is overwhelmingly dominant – to equity - where there is much more competition – fed into good quarterly figures for other providers too.

Lyxor attracted €4.2 billion of net new money and closed the first quarter tied with db x-trackers as second largest provider in the European ETF marketplace in terms of AUM, both with a market share of 9.6%. Db x-trackers had a rough patch in 2016, but has started 2017 clawing back lost terrain with just over €2 billion of net inflows in the first three months.

UBS and Amundi also had a strong quarterly result and remain as fourth and fifth largest European ETF providers, followed by Vanguard, Source and State Street.

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