ETFs are made for these turbulent markets, according to industry giant BlackRock, with volatility testing the resilience of client portfolios, and propelling European ETF trading volume to record levels in the week of 24 February.
In the face of market uncertainty, investors turned to iShares to access markets and make portfolio allocations quickly and cost-effectively using ETFs, the firm writes.
BlackRock reports that last week saw record trading across the European ETF industry with nearly USD100 billion, more than double the weekly average from 2019, while maintaining spreads that were in line with historical averages.
“Our products were supported by a broad group of liquidity providers and served as price discovery vehicles for investors. Fixed income activity was primarily driven by high yield gross flows, which grew 251 per cent.
“EMEA iShares volumes reached a record USD36.3 billion last week, a daily average of USD7.26 billion (1.9x ADV),” BlackRock writes.
The firm observed four trends in global ETF industry flows. Firstly, the majority of selling occurred in equities (-USD27 billion), yet the flows appeared relatively muted in the context of recent strong equity inflows – in Q4 2019, USD145 billion went into equity ETFs globally. BlackRock believes that this might be due to the sudden nature and speed of the correction which may have dissuaded some investors from exiting at levels 10 per cent from highs.
Secondly, fixed income outflows were driven by outflows from EMEA-listed credit ETFs and US-listed HY (-USD1.8 billion), outweighing inflows into rates (USD3.9 billion). BlackRock writes that this illustrates how ETPs are becoming commonplace for investors looking to express asset allocation views in various market scenarios.
Thirdly, ETF flows into defensive sector exposures remained muted, including quality dividends, minimum volatility, and momentum developed market equities exposures, even while these sectors have been outperforming and look well-positioned to provide downside protection in this environment.
Finally, BlackRock comments that, within equities, the trend towards environmental, social and governance (ESG) continued unabated as investors appeared focused on long term risks and re-allocation relating to these factors.
“We saw USD5.6 billion flow into global sustainable ETFs in February, USD1.2 billion of which came last week,” the firm writes.
Andrew Keegan, Head of Wealth in the Client Portfolio Solutions team, says: “Over the past few months, we have used ETFs alongside other tools to diversify our model portfolios and adjust risk, by increasing exposure to high quality sovereign bonds, US and Europe equity minimum volatility, and real estate securities (REITS), while maintaining our gold allocation. As the duration and magnitude of the dip in global growth is uncertain, we are primed to adjust the risk profiles as the data evolves.”
Ursula Marchioni, Head of BlackRock Portfolio Analysis & Solutions says: “Over the past 12 months, our consultations with over 600 European large multi-asset managers shows that investors increased the use of ETFs in their portfolios by 5 per cent on average compared with 2018, across both tactical and strategic asset allocation choices in discretionary and advisory propositions, unit linked and funds of funds.”