Boom Year for ETFs
If sports broadcaster Mel Allen were alive and covering the exchange-traded fund markets, he might exclaim, “How about that?” as inflows appear poised to hit a milestone this year.
After attracting an additional $30 billion in net new inflows in November, equity ETFs are on pace to top $300 billion of inflows in 2017. This is more than the entire US ETF Industry (equity/fixed income/commodity) has ever taken in during a single year, according to State Street Global Advisors.
“How about that?”
In its latest “Flash Flows” report, SSGA, noted that after inflows ramped up in October, equity inflows slowed in November, though they still posted a healthy $30 billion gain. According to Matthew Bartolini, Head of SPDR Americas Research at SSGA, this puts inflows on pace to top $300 billion this year.
“That means that equity funds alone are on pace to take in more annual inflows than the entire US ETF industry has ever taken in in one year,” Bartolini said. “Regardless, barring truly remarkable outflows in December, the industry is on pace to shatter flow records.”
U.S. inflows hit the 19.2 billion mark while global inflows were $1.6 billion. But as Bartolini explained, there was more than meets the eye to these numbers.
“Last month, investors again favored the US in absolute dollar terms, but when viewed under the lens of percentage growth, international wins the “feats of strength”. In 2017, international developed ETFs have grown their asset base by nearly 40 percent, regional exposures by more than 50,’ he said. “In contrast, the $146 billion taken into US focused funds this year represents just 10 percent of asset growth.”
So, what was the sector investors favored the most? Financials, right? Given all the talk of tax cuts and a lower tax base for companies one would bee led to think this way.
Technology led the pack attracting $2.8 billion in new cash amid some observed year-end profit taking. Financials were no slouch though, garnering $2.1 billion of inflows in November – second only to Technology ETFs.
Prior to the last week of the month, Tech had a $2 billion lead over Financials but with the prospects of tax reform seeming certain, financial stocks made a last minute push and closed higher to close November out and the sector contributed to 41 percent of the value outperformance versus growth, while flows into financials ETFs followed, closing the gap,” Bartolini said. “But financials do have fundamental underpinnings, supporting the $10 billion plus flows over the last year, as growth (ex-insurance) for the third quarter was positive, and valuations are attractive.”
In fixed income, bond ETFs took in nearly $6.5 billion in November. Though nominally less than equities, fixed income ETFs have grown assets by nearly a third in 2017, twice the asset growth of equities in this period. In looking at the data, Bartolini said that bond flows this month were more mixed than in October, with roughly half of sectors seeing outflows.
“The leaders continue to be traditional aggregate and investment grade corporate exposures offering a relative yield pick up over Treasuries while introducing some credit risk into the portfolio. For the second consecutive month, government funds were in outflows,” he explained. “The high yield panic early in the month precipitated some selling, though the segment recovered to eke out inflows. The shift was starker in the bank loan space, however. After growing assets by a strong 4 percent in October, a roughly equal amount flowed out of the space in November.”
Drilling down, Bartolini uncovered that the outflows were all lead by passive investment strategies, while active ones saw inflows. Risk aversion wasn’t all encompassing however, as – in keeping with the global theme – investors continued to increase their allocation to emerging market debt by $117 million. Assets in EM debt have now grown by a whopping 44 percent in 2017.
“This is a clear indication that when looking for income, the willingness to accept more yield than investment grade credit but less spread risk than high yield has been a prevalent theme throughout the year as bond investors may want to be able to protect themselves,” he said. “Investors seem to know tight spreads and negative convexity mean they really shouldn’t stay in subjective credits, but baby it’s cold outside when it comes to picking up yield.”
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