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Exchange-traded product industry grows by 14 per cent

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Improving market conditions in September, together with continued positive flows across all exchange-traded product asset classes, greatly contributed to strong ETP market performance in the third quarter of 2010, research by Deutsche Bank shows.

The industry grew by 14 per cent in quarter three year-to-date, sharply up from the flat quarter two 0.1 per cent growth.

Strong ETP market cash flow patterns, together with mildly rising equity markets lead Deutsche Bank to reiterate its 2010 ETP market growth projection of expecting growth upwards of 20 per cent for 2010. This implies additional growth of at least seven per cent in Q4.

While the months of July and August were definitely characterised by a numbness that resulted from last May’s market downturn, September came back with a vengeance and delivered a very strong finish to the quarter. The global ETP industry amassed USD43bn of new money in Q3.

While interest in broad equity market benchmarked ETFs remained subdued throughout the quarter, very strong continuing interest in emerging markets left the most profound footprint on investors’ choices. An astounding USD25.7bn (US: USD18.4bn, EU: EUR5.4bn) of Q3 equity emerging market inflows accounted for 60 per cent of the industry’s quarterly flows. The money was channeled to both broad emerging market indices, as well as ETFs that track single country indices.

Fixed income investing remained extremely popular in the US, with USD10.5bn of inflows, while Europeans continued to support the asset class with USD1.6bn of inflows. The majority of the industry’s fixed income ETF inflows went into US high yield and corporate issuer benchmarked ETFs in both the US and Europe. With equity market volatility decreasing, investors retracted from sovereign benchmarked ETFs, however, they showed preference to domestic fixed income solutions rather than broad domestic equity market indices, putting fixed income products at work in order to generate value.

Commodity investing, through the ascent of gold, defined ETP investment patterns in the second quarter of this year. However, its fortunes have been sharply reversed in the present quarter. Consistent with the uptick in equity investing, gold flows grinded to a halt in the US (USD734m in Q3 versus USD8.4bn in Q2) while Europe continued to see inflows (EUR987m in Q3 versus EUR2.8bn in Q2) albeit at a much slower pace. As the quarter drew to an end the price of gold kept rising, however, gold ETP inflows did not follow. While they stayed in positive territory, their growth pattern became distinctly slower.

The 2010 ETP product launch calendar is set to become the strongest to date. So far the year saw 463 new product launches. This compares very favourably with 2007, which has thus far held the record with 482 new product launches. On average, each quarter in 2010 has seen 155 new products, which make it almost certain that it will register a new high by year end.

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