ETF Investors Go for Gold and Bonds in 2016

The first quarter of 2016 was a rollercoaster for investors. But despite the volatile market conditions the European ETF industry attracted €9.94 billion of new money

Jose Garcia Zarate 14 April, 2016 | 12:26PM
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The European exchange-traded-fund (ETF) industry attracted €10 billion of net new money in the first quarter of 2016. Expectations for this corner of the passive fund world were particularly high in the wake of a record-high 2015 when investors placed €72 billion in these investment vehicles.

Two physical gold ETCs are among the top-three funds of the quarter

Given this backdrop, it would be tempting to class the quarterly outcome as somewhat disappointing. However, this would be harsh judgment given the rather volatile market conditions experienced during the period.

The first quarter of 2016 was a rollercoaster for investors. Many of the assumptions with which we welcomed the year were quickly turned upside down, and many investors were caught off-guard. These conditions were hardly conducive for decisive investing. The analysis of the monthly flows reveals that the initial reaction was one of broad paralysis in January.

ETF fund flows Q1 2016

This was followed by a reassessment of the situation and a move away from falling equity markets into safe havens, primarily gold, in February. Moving on to March, although equity markets had started to bounce back from the lows, investors expressed a strong preference for fixed income exposures, with close to €5.7 billion of net new money placed in bond ETFs during the month.

Despite the positive quarterly flows, overall assets under management in European ETFs at the end of the period amounted to €463 billion, down 1.4% over the previous quarter. This slight decline can be largely attributed to capital losses on equity market holdings.  

Fixed Income and Gold Trackers Prove Popular

Investors pulled out €3.7 billion from equity ETFs in the first quarter of 2016. Europe-wide, Japan and financial services were particularly out of favour, with investors identifying these equity market exposures as bound to suffer most from increased downside risks to the global economic outlook. By contrast, the increase in volatility proved fertile terrain for minimum volatility strategic beta ETFs.

Interestingly, despite the uncertainty surrounding the UK’s EU referendum, UK equity ETFs also did well. However, the preponderance of currency hedged products indicated that retaining broad faith on the UK’s prospects is not at odds with having a negative view on sterling.

Fixed income ETFs have attracted close to €8 billion in net new money in the first quarter of 2016. This was the second highest quarterly outturn for the asset class, only surpassed by the €11.8 billion recorded in the first quarter of 2015. The single common factor shaping investment flows in these two periods has been central bank activism.

The beginning of 2015 saw the introduction of quantitative easing by the ECB. Just over a year later in March 2016, the ECB announced the programme’s extension both in quantitative and qualitative terms.

The inclusion of Eurozone non-bank investment grade corporate debt in the ECB’s programme of asset purchases has only come to provide further fuel to the “search for yield” investment theme. The substantial jump in flows into fixed income ETFs in March has been mostly concentrated in corporate debt exposures, both investment grade and high yield, on the expectation that ECB’s support, although targeted, would nonetheless treacle down across the whole market.

Commodity ETCs and ETFs netted in €4.72 billion over the quarter.  One has to go back to the third quarter of 2012 to see an outcome of similar magnitude.  The bulk of inflows has gone to gold, with two physical gold ETCs - Source Physical Gold ETC (SGLD) and ETF Securities Gold Bullion ETC (GBSS) – amongst the top-three money-gathering products of the quarter.

Strategic Beta Gains Popularity

Strategic beta – commonly known as smart beta – ETFs attracted €2.7 billion in net new money in the first quarter. This accounted for 27% of the total for the entire European ETF market. AUM in these products has increased to €33.6 billion and accounts for 7.3% of the total market.

Strategic smart beta etf fund flows Q1 2016    

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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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Gold Bullion Securities ETC GBP13,583.28 GBP-0.96
Invesco Physical Gold ETC176.85 USD-1.11

About Author

Jose Garcia Zarate

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