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The strongest equity week of the ETF year, with a European flavour


The European exchange-traded fund industry had its best 2012 weekly cash flows the week that ended 22 June, totalling EUR1.4bn.

While the week that ended on 4 May had higher absolute cash flows [EUR3.1bn] than this week, they were largely due to the return of a DAX outflows that had occurred the preceeding week.

Deutsche Bank believes that this week is the strongest ETF cash flow week for 2012.

Besides the magnitude, cash flows this week were strongly directional into European equities, a segment that has seen consistent outflows (broad European equity ETF indices YTD outflows EUR1.5bn) since the beginning of the year.

This week was also decisively different from the prior week, when the industry saw outflows of EUR603m, out of both equity (EUR455m) and fixed income (EUR122m).

The three biggest flow beneficiaries for this week were broad equity (EUR677m), German (EUR631m) and French (EUR149m) equity indices. Broad equity index flows were greatly tilted towards European indices, with over 80 per cent of those flows (EUR554m) going into European equity benchmarked ETFs.

This week’s positive equity ETF flows did not just go to the usual suspect in Europe, Germany. European broad and French equity indexed ETFs also benefited. These significant positive flows, in addition to the lack of material liquidations out of European broad benchmarked equity ETFs over the recent past, signal that ETF investors remain optimistic about this weekend’s European summit.

This could be viewed as optimism going into the discussions this weekend. It is the first time that European leaders go to the negotiating table, with the largest two countries having sharply different views about how to solve the Euro zone debt problems.

Germany remains firmly opposed to the issuance of Euro bonds, over the medium term at least, and remains focused on fiscal discipline and growth at a country level first. France is advocating that discipline and growth, as well as Euro bonds, should happen concurrently, at a European level and sooner rather than later.

Many issues are on the table but the troubles with Spanish and Cypriot banks seem to have given the edge for where EU governance shifts will start to happen. This morning, EU leaders have agreed to create a supervisory mechanism involving the ECB for eurozone banks and an arrangement where the ESM could recapitalise banks directly once that mechanism is in place – but there will be conditions attached. The aim was to have this in place by the end of this year and to break the “vicious circle” between banks and sovereigns. The ESM direct lending to banks would still need unanimous support though according to the Dutch PM Mr. Rutte.

The pressure in the Euro zone’s core has been reflected in ETF cash flows. They have been negatively impacted post mid-March, leading to equity registering the worst 2012 positive to negative weekly cash flow ratio (0.8), among major ETP asset classes. Conversely, fixed income ETFs, an asset class more closely associated with defensive trades, have done very well this year, registering a positive to negative weekly cash flow ratio of 1.3. Total YTD 2012 fixed income ETF cash flows register at EUR2.3bn, 2.5 times those received by equity ETFs (EUR920m) over the same period.

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