ETF Investors Brave Markets Despite Turbulence

The three months to the end of September saw renewed concerns about the health of the global economy - but European ETFs recorded the second highest inflows on record

Jose Garcia Zarate 15 October, 2015 | 10:00AM
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For all the turbulence experienced by equity markets over the period, investors seem to have found comfort in the fact that the US Fed has taken on board global economic trends.

The evidence? The European ETF market regained impetus in the third quarter of 2015, with an estimated €17.7 billion in net new money flowing in. On a historical basis, this was the second highest quarter on record; only surpassed by the first quarter of 2015 when net inflows totalled a rather impressive €31 billion.

The Fed seems to be acknowledging its role as the world’s – rather than just US – central bank. All the while, the ECB has retained its ultra-accommodative stance, while macro readings for the Eurozone have suggested a fair degree of resilience in the face of emerging market woes.

This is a very positive outturn in the face of much increased volatility in financial markets. The three months to the end of September saw renewed concerns about the health of the global economy on the back of what is being perceived as a much faster slowdown in emerging economies; particularly China.

The quarterly breakdown by broad asset class showed a clear preference for equity exposures, with €12.6 billion in net inflows for the period; substantially up from €0.9 billion in the second three months of the year. Fixed income also fared relatively well, netting in €4.4 billion, up from €1.6 billion in the second three months of the year.

Meanwhile, the downside to commodity prices led investors to liquidate close to €0.9 billion in positions in exchange traded commodities (ETCs) and ETFs providing exposure to the asset class.

Developed Equities Remain Preferred Investment Bet; But Japan Falls Out of Favour

Flows data for the quarter continued to show developed market equities as the preferred investment bet for European ETF investors. At the other side of the spectrum, emerging market equity ETFs continued to post net outflows.

According to our calculations, the three top market exposures sought out were Eurozone large cap equity (€4.5 billion in net inflows), US large cap equity (€2.6 billion) and Europe (i.e. Eurozone plus UK, Nordics and Switzerland) large cap equity (€2.6 billion).

Mainstream equity indices continue to dominate the European ETF landscape. ETFs tracking the likes of EURO STOXX 50, S&P 500 and MSCI Europe – for wide geographical bets – or DAX and FTSE 100 – for single-country exposure – featured prominently in the top-20 list for the quarter.

The one developed equity market that fell out of favour in Q3 2015 relative to previous quarters was Japan. European investors may have lost patience with unrealised promises of an economic revival, not least given the much greater vulnerability of Japan to the slowdown of the Chinese economy. 

Increase in Fixed Income Exposure in Q3 Looks Temporary Rather than Structural

Despite the good flows metrics for most developed equity market ETFs, the quarterly data also tells the story of investors hedging the risk by increasing positions in fixed income. The bulk of inflows was directed to standard government bond ETFs, particularly so those providing exposure to the short-end of the maturity spectrum.

This indicates that investors were not seeking yield – which would have hinted at a more structural reason to invest in fixed income – but rather an insurance policy to ride out the volatility in equity markets. One should not be surprised to see a fair number of these fixed income positions unwound in Q4 if equity market volatility decreases.

Net Inflows Record-High Overshadowed by Capital Losses

Overall, 2015 is panning out to be an excellent year for the European ETF industry. With one quarter to go to year-end, total net new money into ETFs already amounts to €52.8 billion. This is €1.8 billion above the annual record high of €51 billion totted up in 2008. We would need to see a sustained negative turn in flows in Q4 for the industry not to hit a new yearly high.

The positive flows dynamics has been offset by capital losses. Financial markets performance over the last two quarters; particularly that of equity markets has been pretty underwhelming. As a result, total assets under management in European-domiciled ETPs at the end of Q3 2015 amounted to €430 billion, down €31 billion from the high of €461 billion set in May.

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.

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Jose Garcia Zarate

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