New research from the global association of regulated funds, the Investment Company Institute, compiled by Dr Rochelle L Antoniewicz, senior director, industry and financial analysis, reveals new insights into the worldwide ETF industry.
The US dominates the USD5.1 trillion ETF sector with 72 per cent of the total net assets, while Europe comes in second with 16 per cent, Asia Pacific at 10 per cent and the rest of the world has just 3 per cent.
US registered ETFs continue to grow rapidly the study finds, with 2018 seeing the biggest growth year to date with USD3.6 trillion in assets as of July 2018 in close to 2,000 ETFs. This from an industry which had just 608 ETFs in 2007, representing assets of USD629 billion.
The predominant focus of the US ETF industry is large-cap stocks, Antoniewicz found. Some USD992 billion sits in large-cap, broad-based domestic equity ETFs in the US, while just USD95 billion is in global ETFs and USD67 billion is in commodity ETFs.
ICI Global’s study found that investor demand for US-registered ETFs is down from its record pace in 2017. Year to date in 2018, saw net share issuance of USD174 billion compared with 2017’s heights of close to USD500 billion. Equities have dominated in both years, with USD346 billion issued in equity ETFs in 2017 and USD111 billion in 2018. Bond and hybrid takes the next chunk with USD123 billion in 2017 and USD97 billion in 2018.
Turning to Europe, ICI Global reports that the total assets in UCITS ETFs is EUR632 billion, with the lion’s share domiciled in Ireland, at 60 per cent followed by Luxembourg 23 per cent; Germany 8 per cent; France 8 per cent and other domiciles such as Sweden or Spain totalling 1 per cent.
UCITS ETFs are also seeing rapid growth and here 2018 has topped 2017 with 1,472 ETFs launched in 2017 against 1,436 in 2018 to May this year, reflecting assets of EUR632 billion against 2017’s whole year figure of EUR611 billion.
As in the US, European ETFs are dominated by large cap stocks, with EUR327 billion of assets while the smallest sector is commodities with EUR10 billion. Within the UCITS ETFs arena, EUR151 billion of assets in fixed income and allocation.
Antoniewicz’s (pictured) study finds that the pattern of investor demand for UCITS ETFs is similar to the US, with 2018 seeing EUR24 billion in flows, or investor demand, to May while the whole year of 2017 saw flows of EUR87 billion.
Within that, investors have consistently liked equities with EUR19 billion in 2018 to May and EUR59 billion in 2017. Fixed income and allocation sits at EUR3 billion in 2018 to May and EUR23 billion in whole year 2017.
The ICI’s study finds that US ETFs and Index mutual funds are increasingly popular with closely balanced net assets of USD3.6 trillion in index mutual funds and USD3.6 trillion in ETFs to July 2018.
The study finds that the outflows from US active domestic equity mutual funds have gone to index funds, perhaps reflecting the more active role of financial advisers who are working towards lower costs and a sharper business model.
The ICI study reveals that US index mutual funds and ETFs are diverse, tracking a wide array of indices, as are European UCITS index and ETFs.
Within Europe, data to May 2018 shows EUR1.1 trillion flowing into ETF UCITS and Index UCITs funds; EUR632 billion flowed into ETF UCITS over EUR485 billion into Index UCITS funds.
The Institute has also looked at US registered ETFs and market impact. For US-registered ETFs, most activity occurs on the secondary market which is measured as average daily dollar volume of ETF shares traded in each category over the 755 daily observations in the sample. The study found that most investors who trade ETF shares on an exchange do not interact with the ETF directly – for these investors, only the ETF shares are changing hands. This means that these ETF trades do not create transaction in the underlying securities or put pressure on underlying markets.
ETFs reflect market conditions: the trading volume rises when market volatility rises because market participants use ETFs to quickly and efficiently transfer and hedge risk.
The study finds that equity market volatility is driven by macroeconomic factors with episodes of heightened equity market volatility predating ETFs; volatility appearing as a global phenomenon which occurs in markets where ETFs play a much smaller role than in the US and the fact that ETF assets have nearly tripled from 2012 to 2018 but equity market volatility has remained relatively subdued.
Another part of the ICI study examined the US trading of ETFs around the Brexit vote.