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In its latest ETP Landscape Report, BlackRock, the world’s largest asset manager and parent of ETF giant iShares, outlined 10 “surprises”, or trends, in the world of ETPs in 2013. They are summarized below.
All flows are global and all data is through November 30, 2013.
1. ETPs listed in the US grew at a faster rate than in any other region
One wouldn’t expect the largest regional asset base to grow at such a high rate compared to smaller regions, but the US industry saw net inflows of $169bn as well as robust equity market returns in 2013. Although the US now accounts for 71% of all global ETP assets, it had the highest growth rate. Year to date, assets have grown 24%, surpassing its three year annualized growth rate of 19%. $16bn or approximately 10% of US ETP flows have come from non-US clients. The US also saw the highest number of new funds with 86.
2. Developed markets equity flows drove industry growth
Flows of $227.9bn into ETPs offering exposure to developed markets equities eclipsed the previous annual record inflows of $180bn (from 2008) and are nearly double the levels seen last year. While other asset classes experienced outflows (commodities and emerging markets equities) or moderate inflows (fixed income), developed markets equities thrived, representing an out-sized portion of 2013 asset gathering.
3. Emerging markets equity flows remain in negative territory for the year
Growth rates for emerging markets economies continue to outpace those of developed markets, yet in 2013 emerging markets equity indices underperformed developed markets by nearly 20 percentage points and US equities by more than 30. Emerging markets equity ETP flows similarly lagged behind, with redemptions of ($9.8bn).
4. Strategic beta equity captured nearly a third of industry flows
Strategic beta equity funds have gained more momentum in 2013. “Strategic Beta” is defined by BlackRock as funds designed to track indexes that weight holdings by factors other than market capitalization such as dividends, volatility or factors (for example, momentum). This concept is also popularly known as “smart beta”. Strategic beta equity funds gathered a record total of $61.3bn – nearly a third of this year’s global industry flows – with asset growth of over 40%.
5. Fixed income experienced a duration rotation but kept growing
In early 2013, market concern over rising interest rates amid improving economic conditions and possible Fed tapering spurred debate over a potential great rotation out of bonds. The ETP industry did not experience a great rotation, but rather a duration rotation as flows shifted from longer- to shorter-maturity funds. Fixed income ETP flows of $25.7bn through November were down from last year’s record-setting annual level of $70bn, but still strong. Short maturity products have steadily gathered $34.7bn while other maturities began to experience outflows in May and have shed ($9.0bn) year-to-date.
6. The pace of new launches moderated, yet these funds attracted meaningful assets
Funds launched since the beginning of 2010 have gathered more than $260bn in net new assets. 485 ETPs made their debut in 2013 and accumulated assets of $22bn through November. Of these new launches, 100 were strategic beta equity funds with total assets of $5.5bn. New fund launches have been on the decline with 659 coming to market last year and more than 900 for each of the prior two years. In 2013, there were 211 funds and share classes delisted. This is on par with 2012, but higher than previous years.
7. Demand and dollars invested in pan European ETPs reached all-time highs
Pan-European equity ETPs surged in popularity on news the Eurozone emerged from recession in the second quarter of 2013. Second half flows totaled an impressive $24.3bn (through November). Europe had remained mired in a long recession. ETPs offering Pan-European equity exposure gathered $2.0bn in 2010 and saw redemptions of ($5.4bn) in 2011 when the debt crisis led investors to rush into safe-haven German equities.
8. Monetary and fiscal policy heavily influenced ETP flows
Volatility in ETP flows was more pronounced in 2013 as shifts in monetary and government economic policies impacted markets, highlighting the value of ETPs in quickly expressing market sentiment. Global flows were particularly volatile from May to September, alternating between positive and negative totals each month. This underscored the importance of ETP liquidity and funds such as minimum volatility that seek to smooth the impact of market swings.
9. US retail investors amped up their ETP usage
Combined ETP assets held by financial advisors, RIAs and individual investors increased 26% YTD through October to $1.1 trillion. ETPs are becoming more mainstream in the US – particularly among individual investors. More than $20bn in flows this year came from individual investors and they now account for 13% of the US ETP market.
10. Gold outflows were a consistent and significant drag on industry growth
Gold ETPs saw outflows every month this year – in contrast to record-breaking flows in 2012 – and assets declined by 48%. There were some upticks in the price of gold in 2013, and easy money policies continued in the US and Japan, but low inflation remained a challenge for gold and rising real interest rates also caused headwinds. Gold can be costly to hold and offers no income stream to investors.
The report was authored by Dodd Kittsley, Head of BlackRock ETP Research, and Raj Seshadri, Head of BlackRock ETP Insights.