Continued wealth management support fuels rising ETF assets

The ETF industry has enjoyed another extraordinary year of asset gathering. At the end of June 2017, there were 1,830 US exchange traded funds with assets of USD2,886 billion according to the latest monthly overview of the US ETF market by Ultumus. Assets in the iShares Core products MSCI EAFE ETF, S&P 500 ETF and US Agg Bond ETF all experienced strong inflows during the month of June, attracting in excess of USD2 billion each along with the SPDR Fin Sel Sector ETF.

Assets in US fixed income ETFs saw gains of over USD4 billion for the month, while the iShares ETF range was the largest winner, increasing more than USD12 billion.

Meanwhile in Europe, ETF data provider ETFGI reported that assets invested in ETFs/ETPs listed in Europe reached a new record high of USD682 billion at the end May 2017 surpassing the prior record of USD658 billion set at the end of April 2017.

At the end of May 2017, the European ETF/ETP industry had 2,276 ETFs/ETPs, with 7,157 listings, assets of USD682 billion, from 59 providers listed on 27 exchanges.

ETFs and ETPs listed in Europe gathered net inflows of USD12.65 billion in May marking the 33rd month of positive net inflows. Year to date, net inflows stand at USD53.21 billion. At this point last year there were net inflows of USD17.60 billion.

Part of the increased assets in ETFs lies that the door of the rise of the robo-adviser and its associated technology which has encouraged wealth advisers of all types to turn to ETFs for constructing efficient, liquid and economical pooled portfolios for clients. 

A survey published earlier this year from BBH found that some 54 per cent of respondents believed that robo-advice presents an opportunity for their business as opposed to a threat.

And in terms of sectors and strategies within ETFs, 2017 is also set to be a growth year for smart beta ETFs. That BBH survey found that some 70 per cent of investors plan to increase smart beta allocation over the next 12 months. This comes from a relatively low base of some 5 to 10 per cent of people's portfolios as advisers try out the concept, testing the waters to see if smart beta ETFs do what they say will. 

The results are proving to be good and the potential of using a smart beta ETF as an alternative to an active fund is slowly being realised. This type of ETF is surely set to grow in popularity.

ESG, SRI or Impact investing is another strong theme in ETFs this year, with an increasing number of ETF providers issuing ETFs using ESG rules to create their ETFs and an increasing number of wealth advisers finding that their clients want those types of products. The BBH survey found that 50 per cent of respondents indicated that ESG factors lie behind their investment decisions and a number of firms have developed ESG data to aid issuers in their production of ESG based ETFs.

Meanwhile, looking at sectors, ETF selection platform TrackInsight has commented that despite some pronounced outflows in June, the Technology Stocks segment saw the biggest sector inflows overall in the first six months of the year, attracting more than EUR4 billion.

ETFs linked to Materials Stocks experienced the biggest outflows with nearly EUR400 million leaving the segment. The Biotechnology Stocks segment was the best performer, with the ETFs in this segment delivering an average performance of 11.23 per cent, closely followed by Leisure Stocks with 10.87 per cent and Internet Stocks with 10.71 per cent. 

The worst performing segment by some way was Gas Stocks which saw performance decline -22.68 per cent over the period, followed by the wider Energy Stocks segment with -16.87 per cent.  

The firm writes that as a proportion of January AUM, the Chemicals Stocks segment saw the biggest change, with inflows of EUR122.7 million representing an increase of 90 per cent in the first half of the year (this doesn't reflect the contribution of performance to June 30th AUM), and Transportation Stocks saw the biggest proportional negative shift in investor sentiment, with outflows of EUR276.5 million representing a decrease of 21 per cent on AUM at the start of the year.

Detlef Glow, head of EMEA research at Thomson Reuters, conducted a recent study into the potential of a period of consolidation in the fast-growing ETF industry. 

He wrote that net new sales figures are the fuel for new product offerings and also for the launch of new ETF promoters, since active asset managers want to capture their share of this growing market. 

However, the flows are intensely concentrated in the European ETF industry, he found with some new firms able to gather assets very quickly for a new launch, while others struggle.

"Since profitability is a key measure for companies, it is fair from my point of view to assume that ETF promoters want to run ETFs that are profitable for them," Glow writes and examined ETFs with EUR100 million in them, on the grounds that this is likely break- even amount.

Glow writes that by the end of May 2017 there were 2,183 instruments (primary funds and convenience-share classes) listed as ETFs in Europe, according to the Thomson Reuters Lipper database, and some 404 ETFs in European have not had assets over EUR100 million at any point in the last three years.

"This meant that 18.5 per cent of the ETFs registered for sales in Europe were at risk of being closed by the ETF promoters," Glow writes. "If all these funds were to be closed within a short time horizon, one could speak of a consolidation; it would mean the number of products available to investors was shrinking. The impact of closing these ETFs could not be neglected, since these 404 ETFs hold a combined approximately EUR11.2 billion in assets under management."

Next, Glow analysed the ETFs registered for sales in Europe by implementing a EUR50 million threshold filter which brought the totals down to 249 ETFs with assets of EUR3.8 billion, while down to EUR10 million, revealed just 40 ETFs.

Glow writes: "The closure of these 40 ETFs would in my opinion still not mark a consolidation, since the ETF promoters may launch a similar number of products over the same or a slightly extended timeframe."

Glow concludes: "I would see such a clean-up of product ranges as a sign of the maturity of the ETF industry and not a consolidation." 

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