Market nerves, trade wars and Brexit appear to have had their impact on the apparently unstoppable growth of ETFs across the world, but the ETF phenomenon is still impressive, despite the first signs of outflows in major markets.
Globally, ETF data provider ETFGI reports that ETFs and ETPs gathered USD8.69 billion in net inflows in June. While this figure represents the lowest monthly amount of inflows since January 2014 it does mean that that at the end of June 2018, the global ETF/ETP industry was still sizeable, with 7,430 ETFs/ETPs, with 14,237 listings, assets of USD4.986 trillion, from 376 providers listed on 70 exchanges in 57 countries.
And the data shows that the majority of these flows can be attributed to the top 20 ETFs by net new assets, which collectively gathered USD105.43 billion during 2018.
The iShares Core MSCI EAFE ETF (IEFA US) on its own accounted for net inflows of USD18.07 billion.
It appears that ETFs asset growths are still driven by new investors arriving in their masses, both from the institutional arena and the private client pool. This is particularly true in the UK, where ETFs are beginning to penetrate the IFA market, despite structural issues that make it, in some cases, hard for them to offer them.
Last November 2017 saw the ETF Securities business being split up and sold off, with the Canvas part going to the UK’s largest investment manager, Legal & General Investment Management.
At the time, head of UK Retail at LGIM, Simon Hynes, commented that the purchase would enable LGIM to bring ETFs to the UK’s IFAs and wealth managers.
“IFAs have not yet adopted ETFs in a great number in the UK because of platform access issues which came out of the fund world, rather than the listed world, but post RDR, we are seeing an uptick in investment trusts and the same thing will happen with ETFs,” Hynes said at the time.
Many UK IFAs, particularly those without direct stockbroking facilities, have struggled with ETFs but one sector that does like them is, of course, the robo-advice sector. Here the aim is to offer broad baskets of portfolios at low cost and entirely through using ETFs.
Writing for the London Stock Exchange on the advantages of ETFs for financial planners, Alan Miller, Founder and CEO of SCM Private, writes: “There is never a completely ‘free lunch’ in investments but ETFs used sensibly are about as close as you can get. Not just because there is significant evidence that over time, simply as a function of cost, an index fund will produce more performance at less cost and with lower volatility than a conventional active fund.
“Of course, there will be exceptions but the odds definitely are working in investors’ favour when using ETFs. In addition, there are significant advantages particularly in today’s volatile markets of knowing the price before you deal rather than after.”
And there have been other start-ups within the wealth management and IFA arena, built entirely upon ETFs. Earlier this year saw Progeny Asset Management launch a multi-asset ETF solution for investors seeking efficient upside exposure and yield.
Their Optimised Passive Income 60/40 is designed for investors who wish to have exposure to a range of global asset classes and a target yield of 3 per cent a year but with modelled annual drawdown in any 12-month period, not expected to exceed 7 per cent.
Progeny writes that this will be implemented via exposure to up to 14 industry-leading iShares ETFs and this product will be available via financial advisers only, not direct to clients.
At the launch, Ian Hooper, Director of Progeny Asset Management, said: “The whole Progeny ethos is customer-led and this is an example of that. We know investors and their advisers need diversified upside exposure and yield, but also wish to understand the downside risks. They expect this in a modern cost-effective and transparent structure.”
And while many of the wealth managers who do use ETFs are sticking with them for exposure to core major markets within their clients’ portfolios, this last year has seen the launch of a wide range of ETFs from those focusing on political policy change, to gender issues or augmented reality.
Top demand from investors is for Environmental, Social and Governance (ESG), Socially Responsible Investing (SRI) or Impact Investing ETFs as investors increasingly appreciate that no longer does investing ethically mean you have to lose some return.
Studies show that the G, the governance in ESG, can in fact mean that returns improve as well governed companies tend to achieve better results.
Using ETFs as a route to including ESG factors has also been studied by State Street Global Advisors, the asset management arm of State Street Corporation, whose latest research that reveals that 83 per cent of institutional investors and wealth managers expect flows into ESG ETFs to increase between now and 2023. Just over one in five (22.5 per cent) anticipated a dramatic rise.
The largest factor behind this growth was increasing demand from investors, followed by an overall increase in demand for ESG strategies, which accounted for 28 per cent of respondents. One in four (25 per cent) say demand for ESG ETFs will be driven by regulatory changes that make those strategies more appealing.
As companies are more regulated to ensure they are complying with environmental, social or governance issues, they will have to change their practices and the investor, whether directly or through an ETF, will have a chance to be part of that process.
ETFs are a useful tool in the wealth managers’ armoury and the growth of their assets demonstrate their appeal for advisers and investors alike. n