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European corporate credit benchmarked ETFs take front seat


February was a positive month for the European ETF industry bringing net inflows of EUR1.5 billion. This level of flows is at par with the comparable month last year that brought in EUR1.4 billion at the time. Equities accounted for EUR1.2 billion, fixed income EUR80 million, commodities EUR27 million and alpha driven strategies added EUR254 million in February.

In terms of direction, February marked a solidification of the trend we have observed in January, with investors continuing to return to the market selectively, after the long drought of the second half of 2011.

The size of February flows was satisfactory but by no means exceptionally high and it was not what left the stronger mark on this year’s ETF investment calendar. It is the focus and directionality of flows that are the big news this month. Both equity and fixed income flows showed strong directionality, even though the surface might point to a flat-line, especially for fixed income ETFs.

European ETF total assets also continued to rise in February, reaching EUR228.1 billion and adding 3.1% over January month end levels. Asset price rises contributed 2.4% while new money accounted for 0.7% of the growth.

Equity inflows clearly had an emerging markets flavor, with total emerging market inflows totalling EUR1.2 billion for February. MSCI Emerging Markets benchmarked ETFs receiving EUR760 million, the month’s biggest equity trend, while BRIC countries received an additional EUR367 million. LATAM broad index benchmarked ETFs also received EUR112 million. Within BRIC, all countries saw positive flows, with China [EUR153 million] and Russia [EUR100 million] attracting the highest levels.

The largest single ETF recipients were the iShares MSCI EM ETF [EUR243 million], the Credit Suisse MSCI EM ETF [EUR197 million] and the db x-trackers MSCI EM ETF [EUR126 million].

The emerging markets theme continues from January, when emerging markets benchmarked equity ETFs received EUR903 million. Interest in January was somewhat different than February, when broad EM benchmarked ETFs [EUR385 million] received less than country and region specific ETFs [EUR518 million].
European equity benchmarked ETFs continue to lose assets

Developed market equity benchmarked ETFs in February presented the opposite picture  when compared to emerging markets. They continued to lose assets, with US and France leading the outflows, registering EUR285 million and EUR235 million respectively.

The overall outflows from Europe represent a continuing âEUR“ albeit slowing – trend from January, when European developed equity market benchmarked ETFs experienced outflows of EUR663 million. Germany was the leading source of outflows in January, with EUR400 million of outflows.
US high-tech, energy and dividends get preference over broad blue chip indices

European domiciled US equity market benchmarked ETFs experienced strong inflows in January, totalling EUR569 million. They however experienced outflows in February totalling EUR285 million, largely driven by S&P500 benchmarked ETFs.

US domiciled ETFs benchmarked to the US equity market experienced flows inflows of USD11.2 billion in January 2012 and outflows of USD186 million in February 2012. This is a trend that is similar to that observed for European domiciled ETFs that track the US equity market. However, looking below the surface, US domiciled ETF investors took much more targeted positions, than the respective European investors, when making decisions about the US equity market.

US domiciled S&P500 benchmarked ETFs experienced outflows of USD4.8 billion in the first two months of 2012 [January: USD30 million, February: USD4.7 billion]. In fact, S&P500 benchmarked ETFs outflows represent the largest US equity trend, when looked at by benchmark.

The non S&P500 US domiciled ETF inflows into US equity market benchmarked ETFs were driven by targeted views on specific sectors. The top ten US equity ETF benchmark flows YTD, totalling USD9.8 billion, represent 87% of the total US equity market ETF flows. These flows were received by ETFs that are benchmarked to high-tech, energy and selective dividends.

Overall European domiciled fixed income funds have received net inflows of EUR501 million since the beginning of the year. Corporate & credit benchmarked ETFs have received total inflows of EUR1.7 billion, while sovereign benchmarked ETFs have experienced outflows totalling EUR976 million.

February marked a decisive change in directional activity for fixed income, in the non-sovereign fixed income part of the European ETF market. Historically in Europe, fixed income ETF trends had been driven [and often dominated] by sovereign flows, which due to the size of the sovereign part of the fixed income ETF market [55%] dictated overall fixed income activity. Sovereign driven trades are generally defensive in nature, while the recent fixed income ETF flows signal investors using corporate and credit benchmarked ETFs to more actively to draw returns.

In developed market issued debt, there has been a clear shift from European sovereigns [outflows of EUR976 million] and money markets [outflows of EUR528 million] towards âEUR“ mainly European issued âEUR“ corporates [inflows of EUR1.5 billion]. Both corporate as well as emerging market and high yield benchmarked ETFs started to see positive flow activity since the beginning of 2012. This activity is characterized by clear trending, both with regards to size as well as direction.

The outflows from sovereign and into corporate and credit is a theme that has held since the beginning of the year. Sovereign benchmarked ETFs had outflows of EUR144 and EUR833 million for each January and February 2012, while corporate and credit benchmarked ETFs had inflows of EUR627 million and EUR1.0 billion over the same respective months.

These fixed income market components have been active in the US fixed income ETF market for the past three years, but European investors stayed largely out. This move points to European domiciled investors continuing to come out of their shell [a state prevalent over the second half of 2011] and focusing on corporate credit and high yield debt.

Cash flows into corporate & credit benchmarked ETFs has followed a steady and upward trend since the beginning of the year, with cash flows exhibiting acceleration in February 2012 [totalling EUR1.0 billion]. This trend took place as corporate bond asset swap spreads declined.

A similar positive cash flow trend materialized in the high yield component of the European fixed income ETF market, however, its cash flow impact was much smaller [2012 YTD EUR358 million].High yield benchmarked ETFs comprise 3.9% of the European fixed income market.

European ETF turnover, declined to 7.2% [from 8.0%] as of the end of February 2012. The equivalent number for the US market stands at 24.2% for the same period, down by 0.3% from the end of January 2012.

European ETFs comprised 2.7% of the continent’s mutual fund industry as of December 2011. European domiciled ETFs registered outflows of EUR3.3 billion over the fourth quarter of 2011, while UCITS mutual funds registered over 17x higher outflows, totalling EUR55.3 billion.

Mutual fund industry data as per the European Fund Management Association [EFAMA] and are currently available until the end of 2011.

US ETFs comprised 8.4% of the mutual fund industry as of the end of January 2012, up from 8.1% at the end of December 2011.

US domiciled ETFs registered inflows of USD27.0 billion in January 2012, while US mutual funds registered inflows of USD35.6 billion over the same period.

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