BlackRock, the world’s largest asset manager and parent of ETF giant iShares, has released its latest ETP Landscape Report, which details trends in the global ETP Industry. The report is summarized below. All YTD data is through July 31, 2014.
Ursula Marchioni, Head of ETP Research EMEA at iShares.
The second half of the year got off to a strong start as global exchange-traded product flows reached $32.0bn in July.
Non-US equities were the big story, bringing in $13.5bn. US equity also gathered $13.5bn, driven single handedly by US large cap flows.
Two trending themes outside the US, emerging markets equity and Japanese equity, generated noteworthy ETP flows. Europe equity remains an ongoing theme, but flows slowed in July. Broad developed equity maintained momentum and leads non-US flows year-to-date.
Emerging markets equity
EM equity flows totalled $6.3bn and sentiment, which turned more constructive in March, further benefited from data on China’s economic growth. GDP grew 2% in Q2, ahead of estimates and faster than in Q1. July’s flash PMI reading also beat expectations, rising to 52. Both of these results indicate that the government’s stimulus efforts are having an impact. This helped lift Chinese equity ETPs as well as broad EM equity funds which gathered $2.0bn and $4.3bn, respectively. While the category is volatile and uneven depending on fundamentals in particular countries, investors have been rethinking their under-allocation to emerging markets.
Japanese equity
Japanese equity markets extended their recent rally. Even absent recent evidence of improving economic growth, investors have been drawn back to Japan given attractive valuations relative to the US and Europe. There is also a belief that the Bank of Japan’s aggressive stimulus agenda will begin to have a greater impact. ETP flows have again begun to rise, reaching $1.5bn in July after stalling in the prior two months.
Europe equity
European equity has been an ongoing investment theme accompanied by strong ETP asset gathering of over $50bn in the past 12 months. However, flows were negligible in July, with inflows from Europe-listed ETPs offset by redemptions for US-listed funds. Despite this, valuations are still attractive on a relative basis and the ECB remains committed to boosting economic growth via more accommodative policies.
Broad developed equity
Broad developed markets funds also remain popular. Inflows were $3.9bn and year-to-date trail only US equity among developed markets exposures.
US equity
ETPs with US large cap equity exposure led all categories globally with $13.9bn even though valuations in the US are less favourable than elsewhere in the developed world. Notably, flows were mixed for cyclical sectors with the most upside as the economy improves such as tech, energy and financials. Technology flows in July totalled $1.0bn. Energy, which has had strong flows year-to-date, was flat, while financials experienced outflows of ($0.7bn). Additionally, industrials and consumer non-cyclicals suffered material redemptions.
Fixed income
The most prominent investment trend to show signs of fading in July was high yield corporate debt. Redemptions for the category totalled ($3.3bn), primarily in the second half of the month. Investors appear to have begun selling in anticipation of higher interest rates next year even though the rate environment remains benign for now. Inflation has not risen materially and high yield debt is a still a viable option compared to other areas within fixed income. Outside of high yield, fixed income ETP flows were a healthy $6.0bn. The key drivers were broad US debt, followed by European government and corporate bonds.
Commenting on the flows and trends, Ursula Marchioni, Head of ETP Research EMEA at iShares, said: “Equities were the story of the month as ETP investors appeared unfazed by geopolitical tensions. $27bn entered global equities through ETPs in July, with many investors focusing on stock markets outside of the US. Emerging market equity products experienced their fourth consecutive month of inflows, gathering $6.3bn in new money during July and bringing total inflows since the start of April to $22.1bn. Interest in Japanese equities picked up in July after several quiet months, and Japanese equity ETPs recorded inflows of $1.5bn.
“High yield ETFs experienced redemptions and posted outflows of ($3.3bn). The overall trend in fixed income ETPs is that US Treasury is relatively out of favour compared with broad European government and corporate bond exposures. Interest in US high yield corporate bond is fading, whilst appetite for broad/aggregate bonds remains in place. Flows into fixed income ETPs as a whole in July totalled $2.8bn, powered by European bond products.
“July was one of the rare months in which the European industry gathered more than $10bn in a single month making it the best month for Europe in 6 years.
“Globally, ETPs attracted inflows of $32.0bn during the month. The industry is maintaining a healthy pace and inflows so far this year are broadly in line with what they were this time last year. On a year-to-date basis, the global ETP market is growing at an annualized rate of 17%, and the European market at 24%. The European ETP industry has gathered more than $42bn this year.”