Market Volatility Spurs ETF Outflows

Europe-domiciled exchange traded funds run by dominant player iShares endured hefty outflows of more than €4 billion in March and April

David Brenchley 15 May, 2018 | 4:25PM

 

Euro bank notes

An outpouring of money from exchange-traded funds could be a sign that investors are turning away from passives strategies as volatility returns to global stock markets.

Europe-domiciled exchange traded funds run by BlackRock’s iShares endured hefty outflows of more than €4 billion in March and April, according to data from Morningstar Direct.

As the dominant ETF player globally, iShares has traditionally been at the top of the inflows list – investors poured €8.5 billion into its products in the first two months of the year alone. Over the past 12 months, the provider has recording inflows of almost €30 billion. But it’s been rock-bottom for the past couple of months.

But there are question marks over whether the reversal of flows is a slight on iShares, or whether risk-averse investors are looking for alternatives places to stash their cash as volatility returns to markets.

Certainly, flows into ETFs have taken a dip over the past two months. After €20 billion of inflows through January and February, ETFs in total saw just €1.8 billion invested in the past two months, according to data from Morningstar Direct.

Many of iShares’ closest rivals have also experienced a tapering in demand. Lyxor, for example, has seen a sharp turn in sentiment, recording inflows of €720 million in February and, just two months later, some €378 million of outflows in April. Vanguard inflows halved in that time to €860 million.

That said, UBS has seen flows move in a different direction, improving from €1.5 billion of outflows in February to €760 million of inflows in April.

Investors Reacting to Short-Term Events

iShares says the flows reflect an overall risk-off sentiment in markets, adding that flows highlight the maturing of the European ETF market, “as investors increasingly use our ETFs at the core of their portfolios, and to efficiently adjust their positioning”.

An iShares spokesperson told Morningstar.co.uk: “Bond ETF usage has grown sharply in recent years and we have seen investors continue to reduce exposure to credit, which has been partly offset by inflows into our government bond ETF range.

“We also saw outflows from large European equity products, which was a reversal of the inflows we saw in Q4 2017 through to the beginning of 2018.”

Matthias Palowski, associate portfolio manager at Morningstar Investment Management, agrees with iShares’ assessment. He notes that monthly asset flows, particularly those into ETFs, generally reflect market participants’ perception towards asset classes.

He explains: “For the first quarter, and especially in March, the broad-based equity correction accounts for the majority of redemptions.” He expects a reversal in May and over the coming months, “highlighting the short-term nature and emotional biases of many investors, selling and buying at sub-optimal times”.

Passive Demand Remains

In May, for the first time in its history, Bank of America Merrill Lynch’s monthly fund manager survey asked global professional investors about their allocations to ETFs. Just over half (53%) of respondents said they use passive instruments, including ETFs, in their strategies.

Around 80% of managers surveyed said their allocation to ETFs is less than 40% of their assets under management. The weighted average investor AUM allocated to ETFs is 20%, which BAML says is well above the average 11% allocation of its private clients.

The results suggest appetite for risk among global, professional investors remains strong, borne out by the overall survey, which shows investors’ positioning tends to still be risk-on.

iShares adds that, while there will inevitably be fluctuations from month to month, “the general trend of growing adoption [of ETFs] remains unchanged”.

Morningstar Investment Management is of the same opinion, with Dan Kemp, chief investment  officer, not expecting passive investing to reach maturity for a long time yet: “While active funds dominate the industry, the movement towards lower costs is forcing asset managers to adapt.”

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About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk