Political Volatility Boosts European ETFs

Shanny Basar

May was the second strongest month for Tradeweb’s European-listed exchange-traded fund platform since its launch in 2012 as fund flows showed a heavy turnover and rotation during the month.

Tradeweb Markets, which provides electronic trading for fixed income, derivatives and ETFs, said in an email that May was the second strongest month on record for its European-listed ETF marketplace since it launched in October 2012, with total traded volume of €22.4bn ($26bn).

Adriano Pace, head of equities (Europe) at Tradeweb, said in a statement: “As the month drew to a close, platform activity accelerated amid heightened market volatility driven by political developments in Italy and Spain. More than €6bn was executed in the last three days of May alone, which translates into 27% of the entire monthly flow.”

Detlef Glow, head of EMEA research at Thomson Reuters Lipper, said in his latest Monday Morning Memo that net inflows last month led to  assets under management in European ETFs increasing to €663.7bn. Glow said the increase of €11.8bn from April was driven by both the performance of the underlying markets and net sales of €1.5bn. Equities had the strongest inflows in May last month, reversing the outflows in the previous month.

Glow added: “This flow pattern drove the overall net flows up to €21.9bn for the year 2018 so far.”

He noted that as the European ETF market is highly concentrated, it was surprising that only three of the ten largest promoters by assets under management were among the ten top sellers for May.

“Europe’s largest ETF promoter – BlackRock’s iShares – wasn’t on the list of the ten best selling promoters for the month,” said Glow.

UBS ETF was the best selling ETF promoter in Europe for May with €3.4bn, more than three times second-placed Deutsche Bank’s Xtrackers with €0.7bn and then Invesco with €0.2 bn.

“The flow pattern at the fund level indicated that there was a lot of turnover and rotation during May, but it also showed the concentration of the European ETF industry even better than the statistics at the promoter or classification level,” Glow said. “It was surprising that only three of the ten best selling funds for May were promoted by iShares.”

BlackRock said in a report, Four big trends to drive ETF growth, that the European ETF market has “massive” growth potential. “Total ETF assets are less than one-quarter of those in the US and began this year with about 16% of global market share,” added the report.

However MiFID II, the European Union regulations which went live this year, require financial advisors to disclose all upfront and ongoing fees to clients in order to increase transparency.

“In the years ahead, BlackRock expects to see new demand for lower-cost index products that will bring adoption of ETFs into advisory portfolios for the first time,” said the report. “Increased scrutiny on product suitability also will likely drive adoption of model ETF portfolios in Europe.”

MiFID II also makes ETF trading more transparent. Approximately two-thirds of ETF trading in the region takes place off exchanges but MiFID II introduces mandatory trade reporting for ETFs for the first time. As a result the number of reported ETF trades has more than doubled this year said BlackRock.

The fund manager continued that Europe’s ETF market is approaching a scale that may attract global investors, especially those using Ucits ETFs.

“Units ETFs offer a cross-border standard of disclosure and investor protection preferred by some European investors as well as those outside of Europe,” said Blackrock. “Investors outside Europe, most notably in Asia and Latin America, could adopt Ucits ETFs more rapidly as liquidity and transparency improve.”

Global assets invested in ETFs and ETPs broke through the $5 trillion milestone at the end of last month to reach $5.004 trillion according to ETFGI, an independent research and consultancy firm.

BlackRock’s report predicted that global ETF assets will reach more than $12 trillion by the end of 2023.

“Sweeping developments within the investment management industry are putting ETFs on course to potentially gather more assets over the next five years than in the previous 25 years combined,” said BlackRock.

The fund manager predicted that global ETF assets are poised to more than double to $12 trillion by the end of 2023 and possibly reach $25 trillion by the end of 2027.

“Recent investor behavior suggests that the money rotation out of traditional active funds will continue, presenting a significant opportunity for ETFs,” said BlackRock. “By one estimate, there was as much as $8 trillion in actively managed assets that effectively hugged their benchmarks in 2015. Future ETF assets may well be sourced, in part, from similar pools as investors seek more efficient means to obtain similar investment outcomes.”

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