A total of USD60 billion of AUM was held in short and leveraged (S&L) exchange-traded products (ETPs) as at the end of August, which is essentially unchanged from the end of July and up three per cent from the end of December 2013, according to figures from Boost ETP.
S&L investor sentiment in equities was mixed in August. At the same time that bearish repositioning drove a large scale unwinding of long positions in US equities, across European equities repositioning was bullish, with creations of long positions coming on the back of redemptions in short positions.
The stark contrast of repositioning between US and European equities is likely driven by a contrarian stance taken by S&L investors amidst the crisis in Ukraine: the new highs attained by the S&P 500 and the Nasdaq 100 during August may have compelled S&L investors to cut their exposures there while increasing them in sluggish performing benchmarks, notably the EURO STOXX 50, DAX 30, and FTSE 100.
Opportunistic positioning around markets most prone to the war between Ukraine and Russia was evident in the bullish stance on German and Russian equity markets. For instance, the USD190 million of net long notional flows (inflows less outflows adjusted for ETPs’ leverage factor) in August of S&L ETPs tracking German benchmarks such as the DAX 30 were the most bullish in Europe. At the same time, Russia’s rouble denominated stock market MICEX has fallen hard this year and coming close to bear market territory is giving S&L investors ammunition to take a contrarian stance and tactically reposition bullishly. The USD31 million of inflows into S&L ETPs tracking Russian equities were the largest within European equity markets, predominantly driven by creations of long positions.
On German debt S&L investors’ stance was markedly bearish, most likely on the back of perceptions that the yields on German Bunds haven fallen too much. With German government debt yielding less than one per cent on 10-year maturities and yielding negatively on two year maturities, S&L investors have turned markedly bearish on German debt. Following USD81 million creations of short positions in August, the cumulative inflows into short ETPs tracking German debt this year so far have steadily risen to USD425 million.
Despite contracting in the first quarter, evidence of the US economy remaining robust in the second quarter as estimates for annualised growth were revised upwards (to 4.2 per cent from 4.0 per cent initially) is likely to have caused a mixed picture of S&L investor sentiment on US debt. Lacking conviction, the USD394 million inflows into long ETPs coincided with USD291 inflows into short ETPs.
S&L investor sentiment in commodities was underscored by bullish repositioning in energy. After the sharp fall in oil prices in July and weakening further in the first and second week of August, S&L investors repositioned around rising oil prices with a strong conviction. With USD146 million inflows into long ETPs and USD258 million outflows from short ETPs exceeding the flows in the same direction in July, the bullish repositioning in S&L ETPs tracking oil appears to have intensified.
Meanwhile, following the sharp falls in July, the reversal in US natural gas coincided with bullish repositioning by S&L investors in August. However, with inflows into long ETPs and outflows from short ETPs in August markedly lower than in July, S&L investors’ bullish stance on US natural gas appears to have weakened. On the back of the crisis in the Middle East and a strengthening US economy, the bullish sentiment underpinning energy is likely to drive S&L commodity ETPs.
Today S&L ETPs cover all major assets classes and geographies. In terms of asset allocation at the end of August, equity ETPs are the most popular with 68 per cent of total AUM (USD40.6 billion), followed by debt (19 per cent, USD11.3 billion) and commodities (six per cent, USD3.8 billion). AUM in currency and alternative ETPs comprise USD4bn. In equities, most of the AUM is focused on the US (USD16.4 billion, excluding US sector equities of USD5.8 billion) and European equities (USD6 billion).
In Europe, broad European region indices (excluding sector focused ETPs) are the most popular (USD2.4 billion in AUM), followed by Germany (USD1.2 billion), Italy (USD659 million) and France (USD590 million). In debt, most of the AUM is in US government debt (USD8.3 billion), German government debt (USD1.2 billion) and Italian government debt (USD220 million). In commodities, natural gas (USD908 million of AUM), silver (USD882 million of AUM) oil (USD813 million of AUM) and gold (USD803 million of AUM) are the most popular.
Viktor Nossek, head of research at Boost ETP, says: “August saw S&L investors repositioning bullishly in European equities and bearishly in US equities. Tactical, contrarian-style allocations, underpinned by macro risks surrounding Ukraine and the Middle East have triggered the build-up of bullish positions in markets most affected by the crises, in particular helping to drive flows of S&L ETPs tracking German and Russian equities. The unwinding of large long positions in US equities in turn is likely a result of the robust showing of US equities. With broad and tech equities having attained new highs, it has given S&L investors an excuse to position bearishly in August. Germany’s record low bond yields have also brought contrarians to the fore, driving the bearish flows seen in ETPs tracking German debt.
“Demand for S&L ETPs was also reflected in Boost ETP’s AUM, which stood at USD130 million at the end of August 2014. The introduction of Boost’s range of 3x short and 3x leverage ETPs was a first in the UK in December 2012 and a first in Italy in October 2013, and it is proving to be a useful tool for investors to hedge risk or express a view with less capital.”
Investors are increasingly using S&L ETPs for a variety of reasons. There is wider product availability, greater product knowledge from improved educational resources, and increased demand for hedging tools and leveraged instruments available. There is also a move towards independent, transparent and exchange traded instruments such as ETFs and ETPs, says Boost.