Market events spur growth and innovation in ETFs, finds BMO

Aug 16th, 2016 | By | Category: ETF and Index News

Exchange-traded funds are increasingly being used by investors to positions themselves for, and react to, major global events. It comes as the range of strategies available increases, catering to investor demand for tactical solutions. These were the latest findings in BMO Global Asset Management’s semi-annual ETF Outlook Report, which highlighted key trends in the ETF industry over the first half of this year.

Global events promote growth and innovation in ETFs, finds BMO

Exchange-traded funds are increasingly being used by investors to position for or react to major global events, finds BMO.

The report found that ETFs were a popular tool for investors who wished to position their portfolios ahead of Britain’s referendum on EU membership, highlighting how these funds can serve as market indicators in terms of investor confidence and asset flows.

With market consensus preceding the referendum expectant of Britain remaining in the EU, investors shifted assets into ETFs tracking broad UK and eurozone equity indices. The iShares Euro Stoxx 50 UCITS ETF (Xetra: EXW1) and the db x-trackers Euro Stoxx 50 UCITS ETF (Xetra: XESC), both following the Euro Stoxx 50 Index, as well as the iShares Core FTSE 100 UCITS ETF (LSE: ISF) and the Vanguard FTSE 100 UCITS ETF (LSE: VUKE), tracking the UK’s FTSE 100 Index, all experienced positive net inflows and significant gains during this period.

Following the surprise vote in favour of Brexit, BMO’s research noted that London-listed ETFs recorded their highest-value trading day ever, with trading volume for London-listed ETFs for the month of June surging 88% higher than in the same month last year.  The report concludes that efficiency in trading ETFs quickly in the aftermath of a major global event was significant in driving ETF flows during this period.

The firm writes that following the Brexit vote, a clear rotation to safety was noted amongst ETF asset flows – ETFs tracking government bonds and longer duration exposures experienced spikes in demand and enjoyed significant rallies in value.

The iShares Core UK Gilt UCITS ETF (IGLT), which tracks a mix of shorter and longer dated government debt, rose more than 4.4% between 23-28 June, while the iShares UK Gilts 0-5 year UCITS ETF (IGLS), which tracks bonds that expire between zero and five years, rose 1.1% over the same period.

Mark Raes, Head of Product, BMO Global Asset Management, said: “Recent market volatility has dovetailed with investor demand and the growing choice in factor-based ETFs. Investors are recognising the value of using ETFs both as long term holdings and as a trading tool to manage market uncertainty and take advantage of short term market movements.

“Global events, such as the Brexit vote, have kept volatility at the top of investors’ concerns. ETFs have proven their value as efficient and effective positioning tools that can help investors manage through market events. In Europe, we anticipate asset growth to accelerate as evolving regulation lowers barriers across individual markets,” he said.


The report goes on to say that a significant number of new ETF issuers have entered the market and, seeking to differentiate themselves from their competitors, have brought to market an increasingly diverse range of strategies. Investors have been particularly attracted to the growing number of factor-based ETFs which are being used for a range of specific functions.

According to the report, investors have favoured income-weighted or quality-weighted ETFs to address their concerns around recent heightened volatility. Income-based ETFs cushion investors from market turbulence by investing in higher dividend stocks and biasing the portfolio towards mature, industry-leading companies, while quality-factor ETFs can also reduce risk by selecting industry-leading companies that are positioned to withstand economic downturns, while at the same time providing growth when markets recover.

To support their income requirements, investors have been favouring ETFs targeting higher-yielding fixed income segments, or ETFs weighted to enhance exposure to companies deemed to be offering attractive and sustainable dividend levels. Speciality ETFs and thematic exposures are also on the rise.

Higher currency volatility, and multiple reverses of currency momentum year-to-date have driven flows into currency-hedged versions of popular ETFs. Following Brexit, BMO notes the most immediate trading occurred in favour of hedged international ETFs, as investors weighed up the implications of the vote on foreign exchange markets. The report states that with both hedged and unhedged ETFs now available, investors can easily switch currency exposures and manage currency risk, while maintaining or shifting underlying portfolio exposures.

Tags: , , , , , , , , , , ,

Leave a Comment