WisdomTree, the exchange-traded fund provider behind the Boost ETP product range, has released a report tracking the global asset flows into short and leveraged (S&L) products.
Viktor Nossek, Director of Research for WisdomTree Europe.
The report revealed that assets under management (AUM) in the S&L ETP space reached a record $70bn at the end of September 2015, a 14% rise year-to-date (YTD), and testifies to the level of adoption these products are receiving among investors.
Short and leveraged ETPs enable investors to amplify market returns or profit from falling prices across various asset classes making them an ideal instrument to express tactical directional views or hedge portfolio positioning.
According to WisdomTree, the asset flows of S&L ETPs can reveal a broader range of investor sentiment than flows or AUM data for mutual funds and other ETPs. Since S&L ETPs tend to be held for shorter periods and used more for tactical positioning, AUM and flows data for S&L ETPs can provide valuable insight into the market sentiment of a relatively sophisticated set of investors.
“September was a strong month for short & leveraged ETPs as investors took advantage of heightened volatility to position opportunistically or hedge their exposures,” said Viktor Nossek, Director of Research for WisdomTree Europe. “Of particular note were the inflows of over $3.7bn into S&L ETPs tracking US, Japanese and European equities last month.”
Investor sentiment towards US and European equities was mixed as evident in the build-up of both long and short positions. “By contrast, there was bullish sentiment with regards to Japanese equities as S&L investors poured into long positions, bringing inflows over the past 12 months to over $7.3 billion.” added Nossek.
“Within fixed income, S&L investors’ bearish positions reversed in September following the Fed’s decision to not hike interest rates in September. Investors took a more bearish stance on German bunds however, with falling bund yields compelling investors to position bearishly. Similarly, investors were bearish towards crude oil with S&L activity in oil YTD helping to drive up AUM of commodity ETPs to $6 billion.”
In terms of asset allocation at the end of September, equity ETPs were the most popular with 72% of total AUM ($50.7bn), followed by debt ($8.7bn) and commodities ($6.1bn). In equities, most of the AUM is focused on US large-cap and US small-cap equities ($18.5bn), Asia-Pacific equities ($13.1bn) and European equities ($6.9bn). In debt, most of the AUM is in US government debt ($5.2bn), German government debt ($1.5bn), and Italian ($266m) and European-region focused ($263m) government debt. In commodities, oil is the most popular ($3.3bn), followed by natural gas ($936m), gold ($737m) and silver ($594m).
Investors continue to increase their usage of S&L ETPs to express tactical bullish or bearish forecasts, attracted by the benefits these products exhibit over traditional derivative positions. Chief amongst these is that investors cannot lose more than their original investment. Other advantages include: reduced credit risk generally and enhanced collateral protection; greater liquidity and ability trade in large sizes; no margin calls or position close-outs; and superior transparency.
The leading issuers of S&L ETPs in Europe include Societe Generale, Boost and ETF Securities who provide a range of products that track key equity indices as well as fixed income, commodities and currencies, while Lyxor, Deutsche Bank and others also offer select products.