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Dividends and corporate bond credit at the forefront in August


August brought a continuation of trading volume decreases both with regards to cash equities and exchange-traded funds, but it also brought a continuation of selective yield driven asset allocation themes, according to Deutsche Bank.

As the year draws to an end, the quest for yield comes across clearly in ETF investment themes on both sides of the Atlantic.

European broad equity diversified bets are on the rise, largely driven by equity price adjustments.

August proved to be strong with US dividend announcements and this helped drive flows towards US diversified equity indices.

ETFs benchmarked to emerging market diversified equity indices saw a second round of interest, based on their relative yield attractiveness when compared to developed market broad indices.

US liquid high yield flows continue to soar on the back of attractive credit spreads.

Investment grade corporate bond flows had another strong month as low interest rate environments in the US and Europe plus relative credit strength make yields attractive.

Over August 2012, the European ETF industry delivered a solid overall cash flow performance with net new money totalling EUR2.5bn, which is 24 per cent higher in USD terms over those registered by US domiciled ETFs over the same period. The European industry is 3.7 times smaller than the US ETF industry. The US industry had its slower cash flow month this year gathering total flows of USD2.5bn. The health of August’s European ETF cash flows came on the back of strong July flows amounting to EUR2.6bn.

Turnover activity remains suppressed both with regards to cash equities in general as well as ETFs. The turnover slump is prevalent both when comparing to the same month last year as well as to the prior month. European cash equities turnover for August is down 16% from July and 49% down from August 2011. European (on-exchange) ETF turnover for August is down 5% from the prior month and 59% from the same month last year. August 2011 was the strongest turnover month for that year, both for cash equities as well as ETFs.

But while the quantity – as measured by turnover volumes – might be thinner this month, Deutsche Bank believes that the quality of the trades is there. European ETF industry August activity was characterised both by stronger equity cash flow performance as well as a continuation of fixed income flow themes. European investors allocated net inflows of USD780m into equity benchmarks, while US investors registered outflows of USD2.3bn over August.

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