March brought EUR1.2 billon of new money into the ETF industry a level that is below the EUR1.5 billion observed in February 2012 and also below that of the equivalent month last year (March 2011: EUR2.8 billion). According to Deutsche Bank, there are a couple of reasons for the solid but yet undeniably slower performance of this month’s cash flows.
“While market mood has improved in the past three months, cash flow levels are still below those that we observed in the first half of 2011. This is consistent with the more somber general market mood and trading activity levels – as compared to that of Q1-11 – across the market and it is not specific to ETFs. Beginning in February 2012 and more specific to ETFs, we have also observed a clear trending into European fixed income corporate bond benchmarked ETFs.
“Fixed income is currently 19.5% of the ETF market, so when fixed income trends materialise they tend to have a lower impact on the overall cash flows. Even further, the corporate bond benchmarked component is 5.4% of the European ETF market. Most of the fixed income ETF inflows we have experienced this year went into corporate bond benchmarked ETFs, while last year, sovereign bond benchmarked ETFs were the largest cash flow recipients. Sovereign benchmarked ETFs are a far larger component of the market currently at 10.4%.”
The advance of the corporate bond fixed income investor is further supported by observing March on-exchange turnover volumes. Corporate bond benchmarked ETF turnover experienced an 11.7% increase in March, registering the strongest percentage as well as absolute (+EUR164 million) turnover performance to reach EUR1.6 billion. Conversely, sovereign benchmarked ETFs experienced the largest decline, both in percentage (-10.8%) as well as absolute terms (-EUR331 million) going down to EUR2.7 billion. Sovereign benchmarked ETFs experienced outflows of EUR120 million over the month of March 2012.
With volatility and strong directionality absent in the equity market at the moment, the buy-and-hold investor gains new importance. This has significant implications towards not only trading patterns but it also signals that fixed income – a trade typically associated with a longer investment horizon – is taking a more active role in asset allocation. With interest rates fairly stagnant across developed markets, the corporate bond trend also points to credit as an increasingly important source of alpha. ETF month in perspective
March continued to see investors shifting emphasis on fixed income, with some more defensive allocations – in the form of long gold, materialized in March. Some equity – mainly global – segments saw inflows as well. European broad indices led the outflow activity with investors taking profits after the Euro Stoxx 50 rose by 4.6% in January and 4.0% in February. Euro Stoxx 50 lost 1.3% of its value over March 2012. Corporate Bonds: Euro investment grade bonds take largest share* Corporate bond benchmarked ETFs gathered EUR2.3 billion of inflows YTD, EUR743 million of which came in over the month of March. Inflows into corporate bond benchmarked ETFs have consistently received inflows since the beginning of the year and March was the second highest flow month this year.
Both investment grade (82%)and high yield (18%) benchmarked ETFs attracted flows, with Euro investment grade bonds receiving the lion’s share with EUR523 million of inflows in March, elevating their YTD inflows to EUR1.9 billion.
Within high yield benchmarked ETFs, flows totalled EUR424 million YTD, with ETFs tracking the USD market attracting 57% (EUR242 million)of the flows, while ETFs tracking the Euro high yield market taking the remaining 43%(EUR183 million).
The top ten corporate bond benchmarked ETFs took in a total of EUR1.8 billion of inflows YTD, comprising 78% of the corporate bond inflows for the year so far. Gold allocations: Driven by Swiss based investors, Gold ETPs gathered EUR761 million of inflows over 2012, EUR557 of which came in March 2012. Gold (USUSD/oz) price registered an increase of 7.4% YTD, while it fell by 1.3% to close at USD1,668.35 in March.
Positive cash flow trends typically occur with a rising asset price in the background and that has not been the case for gold flows over March. Looking at the gold flows a bit closer we have observed that they have largely been received by ETFs which are domiciled in Switzerland.
Swiss domiciled ETFs took in EUR624 million of this year’s gold ETP flows, amounting to 82%of Europe’s 2012 YTD ETP flows. In sharp contrast, Euro area and UK domiciled gold ETPs experienced much lower flow activity. Euro area domiciled ETPs attracted EUR149 million of inflows, while UK domiciled ETPs experienced outflows of EUR5 million in the first quarter of 2012.
Given the geographical concentration as well as the fact that they occurred while gold price was falling it is likely that these gold ETP flows are attributable to instrument re-allocations.
March registered an overall negative pressure on equity, with equity ETF cash flows registering at -EUR26 million. This is well below the EUR977 million observed in the comparable month (March 2011) last year and also that of the prior month (February 2011: EUR1.3 billion).
Euro area broad indices (-EUR370 million), Switzerland (-EUR246 million), and developed Asia pacific broad indices (-EUR217 million) experienced the largest outflows. Furthermore, investment into broad emerging market indices, such as MSCI Emerging Markets, came to a halt by registering EUR146 million of outflows. This follows EUR1.1 billion of inflows in the first two months of 2012.
Broad developed market global equity indices (EUR317 million), Japan (EUR209 million), LATAM (EUR124 million) and Russia (EUR111 million) were net recipients of flows throughout March.
European ETF turnover as a percentage of the region’s cash equities turnover declined to 7.3% (from 7.6%) as of the end of March 2012. The equivalent number for the US market stands at 24.6% for the same period, up by 0.4% from the end of February 2012.
European ETFs comprised 2.9% of the continent’s mutual fund industry as of January 2012. European domiciled ETFs registered inflows of EUR2.4 billion over January 2012, while UCITS mutual funds registered inflows totalling EUR18.8 billion. Mutual fund industry data as per the European Fund Management Association (EFAMA).
US ETFs comprised 8.6% of the mutual fund industry as of the end of February 2012, up from 8.4% at the end of January 2012. US domiciled ETFs registered inflows of USD9.5 billion in February 2012, while US mutual funds registered inflows of USD40.4 billion over the same period. Mutual fund industry data as per the Investment Company Institute (ICI).
