Last year marked a record year for ETFs across Europe, with both fixed income and equity funds seeing massive inflows. Assets in ETFs across the globe hit $347bn (£242.8bn) at the end of 2015, finds BlackRock and iShares research.
ETFs and ETPs listed in Europe gathered $82bn in net new assets in 2015 – a 32.5 per cent rise above the previous record level of S$61.8bn seen in 2014, data from ETFGI shows.
Data from Morningstar highlights that managers in the ETF space are winning in the race for assets. For the full year 2015 Vanguard and iShares topped the list of global asset managers in terms of asset flows.
ETF provider Vanguard garnered $251.3bn in estimated net flows last year, while iShares saw $128bn in asset flows. Also featuring in the top 20 for total asset flows were Dimensional, WisdomTree and Deutsche X-Trackers. Meanwhile, the top outflows list was dominated by active managers.
Adam Laird, head of passive investment at Hargreaves Lansdown, thinks it is a trend that is here to stay. “I think it’s a continued pressure on costs, so we have seen more investors using passive funds for a number of years and the RDR has sped up the process.”
“The competition is heating up, as I think investors are become more aware of the rationale behind passive, so this is all contributing to the popularity,” he says.
Patrick Norwood, an insight analyst for funds at Defaqto, says part of the move comes from investors’ uncertainty that they can pick a successful active manager.
“We see no sign of the trend going down as people want lower cost solutions, obviously in a situation like a stock market crash there may be blip in the trend for a few years,” he adds.
But where are these flows heading?
For tracker funds investors are very much sticking to broad equity exposures, with the best-selling indices being the likes of the FTSE All Share and global trackers.
One growing area is in the use of bond ETFs, says Laird, which is coming from a smaller base.
Use of bond ETFs grew by 22 per cent across the globe in 2015, according to BlackRock and iShares data, with fixed income flows of $93.5bn breaking the annual record set in 2014.
“Bond ETFs enable retail and institutional investors to access the bond markets at known, transparent prices and with impressive liquidity,” says Mark Wiedman, global head of iShares at BlackRock.
These flows into the bond space are having a knock-on effect on active managers, who are already seeing tough liquidity in the space when trading.
Gareth Isaac, fixed income fund manager at Schroders, says one of the main drivers of the problems in the high-yield market has been ETF and US mutual fund flows.
“Mutual funds in the US and ETFs have been sold down relatively aggressively purely on the risk-off environment we have seen over the past three to six months and I think that creates problems. Generally in financial markets it is very difficult if you get outflows in high-yield bonds to actually trade them in any size at all,” he adds.
“That is one of the problems ETFs have had, you’ve had big outflows in that market. What you do find is if you have outflows as a fund manager you can’t sell what you want as there is no market for it you have to sell what you can, which means whole market beta as such gets hit quite dramatically.”
Another growing area is investors looking for income-producing products. Rather than finding this in the fixed income market, many are looking to equity income products, says Laird.
“The focus on income, I think that’s one that has really sprung up in the past 12 months. It is a lot in the equity income space, Vanguard has had an income fund for a long time but groups like iShares and Wisdom Tree are doing more to eat into that space. I’m seeing it increasingly creeping into traditional asset portfolios,” he says.
But with volatility in the market currently, is that putting people off investing in indices that are yo-yoing on a weekly basis?
Laird says a check of Hargreaves Lansdown data for the first two weeks of the year, which saw extreme volatility, did not show much slowdown in growth in the passive space.
“Investors are still moving in. The volatility will put some off but for others it’s a chance to top up to investments at the lower level, so there can be positives at a time like this,” he says.
There was a shift in where investors are putting their money, with some flows out of Asian products and into more safe-haven products, in particular gold saw inflows amid the volatility.
BlackRock and iShares data highlights this, showing outflows of $26.6bn from emerging market equities in 2015, compared to outflows of $1.8bn in 2014.
“Last year we saw lots of outflows from emerging markets because people obviously saw them fall quite a bit and were worried about the Fed increasing interest rates,” says Norwood.
“While there were lots of outflows from emerging markets last year there were lots of inflows into the development markets and we will continue to see that this year with people moving out of emerging market type regions where there has been volatility.”
The market is also moving into increasingly niche areas.
Last month saw the launch of BlackRock’s ETF for the Israeli market, marking the first fund to offer exposure to the 25 largest companies listed on the Tel Aviv Stock Exchange.
One area of the market that has seen more investor interest is in the active ETF and smart beta space, which has attracted more launches in the past year.
However, the market has also seen a number of closures in the past year, for products that did not gain traction.
At the start of 2016 there were 30 active ETF products across Europe, compared to 36 at the start of 2015. However, at least four new products were launched in the past year, meaning the number of closures is likely to be more than 10.
The db X-trackersSCM Multi Asset ETF was one such closure last year. Run by wealth management firm SCM Private, the first ETF of ETFs was launched in March 2012, but closed after the funds under management dropped below £500,000.
“Looking globally, this is against the trend. In the USA, there was an 11 per cent increase in the number of active ETFs, from 125 to 139. In the rest of the world, it increased by around a third,” says Laird.
With more providers moving into the ETF market, further price cuts are expected.
Last year saw a number of providers reduce the charges on their funds, particularly for broader index funds. But this year is expected to see price cuts in more esoteric areas, as assets in each fund grows.
“We’ve now got mainstream areas at really low cost, of under 0.1 per cent, and I know that the next areas that providers are looking to is to try and differentiate themselves by offering more satellite investments at lower costs,” says Laird.
“We have started to see that in some emerging market areas and in some things like high-yield bonds, these are the area that will be feeling the price cuts in the next year or two.”
However, Hector McNeil, co-chief executive of WisdomTree Europe, says that the focus next year will shift from price to be on performance. This will be spurred on by the increasing shift of assets to smart beta, he says.
“The pricing of core ETFs has already arguably won the battle with mutual funds when it comes to the provision of passive trackers,” he says.
“We are yet to see this focus on performance after fees in the ETF space to the same extent as exists in the US, but as smart beta picks up momentum in Europe we believe it to be the direction of travel over the next few years.”