BlackRock highlights the 12 surprises of the ETP industry in 2012
19 December 2012
By ETFI Asia
Global exchange traded product (ETP) flows continued at a record-setting pace in 2012, reaching US$219 billion through November in the face of global trepidation over the impending US fiscal cliff and continued financial strains in the eurozone. Total assets have increased by 23% from 2011 to $1.9 trillion.
Some surprising trends in the ETP growth story lie beneath the larger trend.
12 surprising ETP Trends in 2012
1. ETP flows maintained positive momentum throughout changing risk-on and risk-off market conditions. Strong inflows in buoyant equity markets are no surprise and overall 2012 has delivered double digit equity returns, perhaps unexpectedly in a year characterised by global macroeconomic headwinds. However, within these positive results were downside stretches including a 13% decline from early April to early June. Despite significant and pronounced risk-off periods, ETP flows were positive every month this year, for the first time since 2008.
But how are flows impacted during longer downside periods? Remarkably, the strongest year for ETP inflows was 2008, a year in which the MSCI All Country World Index was down 44%.
Why have flows held up in risk-off markets? Shifts in investor sentiment during risk-off periods can send money in search of lower risk exposures which are well represented by ETP offerings. Down markets also draw in investors positioning for an upturn. Because ETPs still represent a small percentage of investable assets, money in motion under any market scenario has often been favourable to the industry.
2. Declining and persistently low interest rates have not dampened fixed income ETP flows, now at an all time high of $68 billion through November and 13% higher than the annual record set in 2009. Bond ETPs account for 31% of all year-to-date industry flows, versus 12% in 2008. While all segments of the ETP Fixed Income market have grown, this year’s flows have been more concentrated. As credit spreads tightened from 233 to 147 basis points, strong flows occurred in investment grade corporate, high yield and emerging market debt, reflecting an increased tolerance among investors for risk in order to gain access to yield. Flows have been remarkably steady; particularly in investment grade corporate ETPs, which have captured net inflows on 88% of the trading days this year.
3. Minimum volatility equity funds were one of the more successful strategy-based categories with $4.4 billion of inflows, capitalising on investors’ desire to manage volatility. These exposures seek to provide equity returns with less volatility than market cap weighted benchmarks. Investors also added $5.4 billion into Volatility ETPs that seek to deliver returns correlated to volatility indices. These types of funds tend to produce higher returns when equity market volatility rises. While 2012 may have felt like a volatile year to many investors, the VIX index hit a three-year low in September, producing negative returns for those maintaining assets in VIX-based ETPs.
4. While much has been written about active ETFs as a future driver of growth, the potential remains largely untapped with the category representing 1% of industry assets and 3% of 2012 YTD flows. Different transparency standards and other operational differences between ETFs and most active mutual funds remain key inhibitors. PIMCO has bridged the divide, collecting 73% of all 2012 flows into Active ETFs. While long-term potential may exist for active funds to boost ETF growth, we don’t expect these ETFs to account for a material portion of industry growth in the near term, particularly in the equity space.
5. Gold accounts for such a large portion of the commodity asset class that one could argue it’s become its own asset class. Global ETP gold holdings now stand at 2,607 tons. Together these funds would rank as the fourth-largest holder of gold in the world behind central banks in the US, Germany, and the IMF. Gold now accounts for 8% of global ETP assets, 70% of commodity assets and 83% of YTD commodity flows. Gold assets have grown from $20 billion in 2007 to $144 billion today, a compound annual growth rate of 49%. Investors in European ETPs have embraced gold with gusto, accounting for 46% of global Gold YTD inflows and 34% of gold assets, even though the region accounts for 19% of total global ETP assets. Gold is a natural beneficiary of the current monetary regime characterised by negative real interest rates.
6. Much has been written about ETP closures, but innovation continues. Although the pace of new product launches has slowed from recent years, the 570 ETPs launched in 2012 have already amassed more than $27 billion in assets. Despite an increase in delistings in 2012 with 167 closures to-date, the overall success of new products from the last four years will likely entice providers to launch more new products.
7. Assets in emerging markets debt ETPs doubled in 2012 to $20 billion. The category now accounts for 6% of the fixed income ETP universe, up from less than 2% going into 2010. There are now 59 emerging markets (EM) bond ETPs offered globally, providing increased choice in segments like EM corporate and EM high yield bonds. Credit quality is higher than often perceived. For example, 88% of the bonds in the Barclays EM Local Currency Government Index are rated investment grade. 14 EM debt ETPs have been launched this year, raising $1.2 billion in assets through November 2012.
8. Canada had the highest asset growth rate of any region at 29% for 2012. Assets scaled from $42 billion in 2011 to $55 billion in November 2012. This robust growth rate is up materially from 2011 when the Canadian ETP industry grew 10%. Record breaking inflows of $10 billion helped propel growth. Canada is the birth place of first ETF which began trading in 1990. There are currently 272 ETP listings in the region and 55 or 20% of those were launched in 2012.
9. Among the top 15 new products in 2012, ten are listed in Asia Pacific and six provide exposure to Chinese equities. More than one third of the assets in new ETPs went to those in the Asia Pacific region. This is remarkable given that assets in the Asia Pacific region account for only 6% of the global total. The emergence of the Chinese ETF market is a material addition to the global growth story and one to watch closely in 2013 as market providers seek regulatory approval to offer ETFs in asset classes beyond Chinese equities.
10. There was notable divergence of $287 billion between flows into equity ETPs and out of equity mutual funds. Mutual funds saw redemptions in the equity category of ($157 billion) while ETPs gathered $129 billion over the 11-month period through November: an absolute difference of $287 billion between the two results. While it’s not unprecedented for ETPs to outpace mutual fund equity flows, this has historically been most pronounced in years that experienced negative market returns (in both 2008 and 2011). Equity returns were positive this year and ETPs still out-gathered mutual funds in equities.
11. The cyclical timing of 2012 flows was quite different than the typical pattern with a stronger January than prior years. Over the seven years prior to 2012, January flows averaged 2.8% of the total for the year. The expectation goes that Q4 will see strong cyclical inflows and January will experience headwinds as investors unwind some year-end tactical positions. Unexpectedly, January 2012 was the best January ever for the industry and the second best month of 2012 with $33.5 billion of inflows or 14% of the annualised total. February showed sustained momentum with $15.6 billion. This change in investor behaviour helped propel 2012 to the highest industry flows level on record for the 11 months through November.
12. Breadth in the market continues to expand. The number of ETPs that have surpassed the threshold of $500 million in assets now total 480 offered by 51 providers versus 340 offered by 45 providers in 2009. Products at this asset level are widely viewed as successful and profitable. That’s 140 more products that joined the ranks of prosperous funds. These results will continue to encourage new and existing providers to innovate and offer more products.
More News >
Discuss: BlackRock highlights the 12 surprises of the ETP industry in 2012