ETF Assets, Flows Push to New Records

• Dr. Jan-Carl Plagge, Head of Applied Research
  

New money and total assets in exchange-traded funds (ETFs) continue to break records, as more investors turn to a growing range of low-cost vehicles to participate in rallying equity markets.

ETFs and exchange-traded products (ETPs) listed globally attracted a net $391.3 billion in the seven months through July, more than the annual record of $390.4 billion of inflows in all of 2016, according to research firm ETFGI.¹ Total assets managed by the funds have grown 21% in 2017 to $4.28 trillion, also an all-time high, as stocks rallied.

Pulse Online talked to Deborah Fuhr, managing partner at ETFGI, about the relentless growth in ETFs. Fuhr said that while many aspects of the funds have helped them lure money, future flows will be aided by tighter regulation of markets, new listings and increasing investor education.

Fuhr cited several drivers behind the increasing adoption of the funds, including their cost effectiveness, an expanding range of products into new strategies and geographies, greater investor and advisor familiarity, and the growth in automated ‘robo’ advisors that increasingly use ETFs.

“The fact that ETFs are a very democratic product used by end retail consumers, financial advisors and institutional investors alike, where the same toolbox of products is offered to everyone, and at a minimum cost, is quite unique,” Fuhr said.

Fuhr also highlights the importance of new regulation across the world, which in many cases has called for more on-exchange trading. Some jurisdictions have also banned financial advisors from getting paid for specific recommendations, a practice that has in the past favored the adoption of higher-fee financial products.

Simplicity, value and liquidity help industry grow

Momentum has seen the ETF industry reach several milestones in recent months. Last June, assets under management in ETFs globally surpassed those invested in hedge funds by $1 trillion. Assets in US ETFs broke in July through the $3-trillion level for the first time.

More institutional investors such as pension funds and insurers are making use of ETFs, attracted by their ease of trade, transparency and low cost, combined with fundamental benefits such as diversification, intra-day trading and liquidity.

“The expansion of products has also allowed people to use ETFs as solutions to deliver different outcomes,” said Fuhr. “People are using them for tactical asset allocation, but also for strategic and targeted investments. You have investors using them for the long term and the short term.”

European ETFs and ETPs have gathered a net $74 billion in 2017, smashing the record $55.7 billion lured in all of 2016. Through July this year, assets in the funds increased 22% in 2017 to reach an unprecedented $700 billion, ETFGI data show. 

Flows are also being helped by strength in financial markets. Stocks have gained this year amid synchronized economic growth in all major regions and as central banks pledge to keep monetary stimulus. The STOXX® Global 1800 Index climbed 13.5% between Jan. 1 and Jul. 31 of this year, taking the gain in the past five years to 74%. The EURO STOXX® 50 Index of companies in the Eurozone has advanced 7% this year.

Going forward – smart beta, fixed income, ESG

A boom in alternative-weight indexing such as dividend and factor strategies drove assets invested in so-called smart beta equity ETFs listed globally to a record high of $607 billion at the end of July, ETFGI said. That represents an increase of 18% from 2016, and a 5-year annual average growth of almost 32%.

“Smart beta is new and still evolving in terms of what it is and how people are using it,” said Fuhr. “I do think the educational process around understanding it is much longer than with traditional indices, so I think that it will continue to drive flows.”

Fuhr also sees the introduction of fixed-income and multi-asset indices and those tracking environmental, social and governance (ESG) strategies, as driving a new leg of inflows.

ETFs assets will also grow through increased availability in new markets, she added.

“The other driver for many people as they look to invest outside of their home countries, is that it often becomes hard for them to buy active mutual funds or individual securities,” said Fuhr. “In that sense, we are seeing great progress in adoption and availability of ETFs.”

Finally, Fuhr expects the set of new market regulation in Europe that is due to take effect next year, known as MiFID II,² to further drive flows into ETFs.

“MiFID II should require that more trades be done on exchange in the sake of greater transparency,” she said, “which will be helpful for the ETF industry.”

Inflows by asset class

Globally, equity funds lured the largest net inflows this year, with a record $272.2 billion. Fixed-income ETFs and ETPs followed with record inflows of $96.2 billion, while commodity funds attracted $4.3 billion in flows.

ETFGI is a leading independent research and consultancy firm whose database covers over 4,700 ETFs and ETPs from over 200 providers on 50 stock exchanges. Before founding ETFGI in 2012, Fuhr was a managing director covering investment strategy at BlackRock and Morgan Stanley.

¹ Data from ETFGI’s web page.

² The Markets in Financial Instruments Directive.