Global ETP industry year-to-date flows crossed $500bn in October ….
Patrick Mattar, from the capital markets team at iShares
Global ETPs gathered $58.5bn in October, propelling year-to-date industry flows to $517.1bn, eclipsing last year’s record full-year total and led this month by U.S., broad global and broad emerging markets (EM) equity exposures
U.S. equities drew in $30.5bn driven by a rebound in large caps and faster flows to small-caps amid strong earnings reports and renewed optimism for tax reform
Broad global equity exposures brought in $12.7bn as global risk assets rallied on the Japanese election outcome and prospects for more central bank stimulus in Europe
Broad EM equities maintained momentum, gathering $4.6bn this month, focused in the week leading up to China’s Communist Party Congress
Monthly net flow into EMEA-listed ETPs picks up to $7.8B
EMEA-listed ETPs gathered $7.8B in October, up from $6.9B in September. Net inflows across asset classes hit $81B YTD – already beating the previous calendar-year record set in 2015.
Equity ETPs dominated again with $6.3B of the inflow. Fixed income ETPs gathered $1.1B, a small uptick from September’s meagre $800m inflow.
Commodity funds listed in EMEA had their first month of inflows since July.
Key themes this month:
1 DM’s broad shoulders
October was the biggest-ever month of inflows (+$2.4B) to EMEAlisted broad developed equity ETPs, only the second time ever that the monthly inflow has been over $2B.
Flows to broad DM equities have spiked in the fourth quarter in recent times – four of the last five years have had greater inflows in Q4 than any other quarter, evidence perhaps of investors returning to benchmark allocations as the year draws to a close.
Investors in US-listed ETPs also chose broad developed equities this year, albeit through developed ex-US exposures such as MSCI EAFE. In 2017 so far, these US-listed funds have added a staggering $84B – more than the inflows across all asset classes in the EMEA-listed ETP industry (+$81B).
2 European equity staycation
October was another positive month for EMEA-listed European equity ETPs. They have now had 14 consecutive months of inflows – continuing their longest run on record.
While European investors continue to invest in European equities, US investor appetite seems to have cooled. $1.3B has been withdrawn from US-listed European equity ETPs over the last three months. Recent US dollar gains might have encouraged US investors to return to domestic, USD-earning equities.
European business confidence, as measured by manufacturing PMIs, is at an 80-month high. With a weakening euro likely to benefit export-heavy European companies, we may see US investors return, though they may choose to do so through currency-hedged vehicles.
3 Making the grade
October was good for investment grade (IG) fixed income ETPs, which added $1.3B – the majority in US dollar ($) IG ETPs (+$0.8B).
While equity ETP flows often show home country bias, this is less of a driver in fixed income. This year $6.2B has been added to EMEA-listed $ credit ETPs vs. $2.9B for euro (€) credit ETPs.
€IG funds have had a bumpy year (see Where credit’s due) but have broadly had inflows since the French election in May. $IG ETPs, however, have barely paused for breath. Though the political landscape has been volatile on both sides of the Atlantic, the higher yields on $IG relative to most DM equivalents have attracted yield-hungry international investors.
4 EMD of the road
October was the first month of the year in which there were outflows from emerging market debt (EMD) ETPs, which lost $0.57B. This ended nine straight months of inflows that had added $9B to local and hard-currency exposures.
The majority (-$0.4B) of the outflows in October were from local-currency products, which had been ahead of their hardcurrency equivalents by $0.5B this year, leaving them just $0.2B ahead.
Despite improving economic conditions, earnings growth and investor sentiment, local currency weakness vs. USD has dragged down returns and appears to have spooked some investors.
5 Sustainable breakthrough
2017 has been a breakthrough year for EMEA-listed sustainable ETFs. $2.3B has been added, eclipsing the previous best calendar-year inflow of $890M. The average monthly flow into these funds between 2010 and the start of this year was $30m; in 2017 the monthly average is $230m.
There appears to be a growing acceptance from investors that indexed products can provide exposure to sustainable investments without compromising returns. The MSCI Europe SRI index has outperformed MSCI Europe by 1.25% YTD (source: Bloomberg at 31/10/2017).
Sustainable index investing is one area where the US lags Europe. Changing end investor attitudes, alongside greater regulatory focus on ESG in certain European countries, could lie behind this difference.