FYI | Jul 11 2012
By Greg Peel
Exchange traded funds (ETF) have now been the fastest growing investment product globally in the past decade and continue to be so. To learn the basics of ETFs, readers are directed towards articles from FNArena's SMSFundamentals series: Active, Passive And ETFs; Exchange Traded Funds Part II; and Learn More About ETFs.
The past decade has also seen rapid growth in commodity ETFs which provide exposure to commodity prices through stock exchange listed products. These products are also called exchange-traded commodities (ETC) and together with equity, fixed income, cash and currency ETFs the complete set is now known collectively as exchange traded products (ETP). It all gets a bit confusing, so I just prefer to call them all ETFs.
When we talk of investment inflows into ETFs, we must consider that new ETFs are being listed all the time across the globe as demand dictates. Hence growth in “asset under management” (AUM) levels for ETFs reflects both growth in investment and growth in products in which one can invest. In Australia for example, the first ever fixed income ETFs were listed only this year but now number seven.
To access a table of all ETFs listed on the ASX click here.
Inflows for the first half of 2012, notes BlackRock, were the largest ever for the global ETF industry. ETFs attracted net new assets of US$105bn over the period, representing a 16% increase over the previous record first half in 2011.
As global markets continue to be volatile, says BlackRock, investors are using ETFs to capture new and diversified sources of income. Fixed income was the main driver of growth in 1H12, attracting 41% of all inflows or US$42bn. This figure represents a 114% increase on 1H11. June represented the eighteenth consecutive month global fixed income ETFs have attracted net inflows.
Other income-focused ETFs, including those providing exposure to high-yield equities, preference shares and real estate saw US$17.9bn of inflows, up 44% on last year.
Breaking the half down into two quarters sees a first quarter bias for total inflows, with Q1 seeing US$65.4bn and Q2 US$39.6bn. The drop in Q2 is primarily attributable to a fall in equity ETF inflows, BlackRock notes.
The following table illustrates the significant changes in investor portfolio allocations, using ETFs inflows as the proxy, from 1H11 to 1H12:
We note North American equities continue to attract consistent flows while, understandably, European equities have become a no-go zone. Emerging market equities have also lost their lustre as BRIC economic growth continues to slow, while “Other Developed” equity, which would include the UK, Japan and Australia, has picked up some of the slack. With commodity prices sagging over the past twelve months, commodity flows are understandably weaker, while far and away the stand-out development is the surge in fixed income flows.
Fixed income investment is less of a new trend than a lost art. While the average retail investor in Australia has long defaulted to the “stock market” as representing investment, the same average investor's grandfather would have spoken of “stocks and bonds”. Decades ago, corporate bond listings formed a significant cohort amongst equity listings on the old Sydney and Melbourne stock exchanges but slowly their popularity waned with time. We are nevertheless now undergoing a resurgence in listed corporate bonds (recent bank listings are a good example), and the advent of new products such as fixed income ETFs is allowing self-managed super fund trustees to establish more balanced portfolios in the same way institutional funds always have.
For the SMSFs, particularly those representing retirees, the search for more certain yield and less capital volatility has become all important in the post-GFC era.
The following pie chart, again using ETF investment as a proxy, shows that while equity investment still dominates assets under management globally, commodity and fixed income investment is providing a greater diversification:
Looking at the most recent monthly data, BlackRock notes global equity inflows into ETFs of $11.9bn in June were on a par with May, but composition favoured developed market equity over emerging market equity. June saw a big jump in US large-cap inflows following flat to negative flows in the prior two months.
Gold ETFs saw net outflows in April and May but bounced back in June with a US$2.2bn increase. Another perceived safe haven – US Treasury ETFs – saw US$4.5bn of inflows in May but US$132bn of outflows in June. One might assume the perception here is that US bonds have become very expensive (low yield) while this year's correction in the gold price is offering an attractive entry point ahead of any further global policy easing (QE3 etc).
Fixed income flows in June can be broken down into another strong month for investment grade corporate ETFs (US$3.2bn of inflows and US$15.5bn for the half), and a muted month for high-yield (junk) bond ETFs (US$0.3bn of inflows following US$1.3bn of outflows in May). Government bond ETF inflows were moderate through April, surged in May at US$15.5bn, and fell back in June with US$0.3bn of outflows.
I noted at the top that ETFs represent the fastest growing investment product globally. The first half of 2012 saw 362 new ETFs listed globally which by end-June had attracted US$14.7bn of inflows.
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
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