Banks, Financial

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Categorized | Equities, Financial

Rush for exposure to US fuels ETF inflows

Posted on December 28, 2014

Finished post flags sit in a box at the Annin & Co. production facility in Coshocton, Ohio, U.S., on Friday, May 4, 2012. Annin & Co. is the world's largest and oldest flag company with 500 hundred employees producing 15 million flags a year, according to the company web site. Photographer: Ty Wright/Bloomberg©Bloomberg

A scramble for exposure to the US’s economic recovery dominated flows into fast-growing exchange traded funds in 2014, and contrasted with fading investor enthusiasm for Europe.

International flows into all ETFs with exposure to the US this year were equivalent to almost 50 per cent of starting assets under management — the strongest since 2008, according to an analysis for the Financial Times by Markit, the financial data provider.

    ETFs trade like stocks but track baskets of securities and are used by investors as an easy way to take bets on economies or regions. The asset class has expanded rapidly in recent years with total assets under management increasing 16 per cent to $2.7tn in 2014. ETF data provide an up-to-date guide to investor trends.

    The popularity of US-orientated ETFs reflected investor optimism in the country’s growth prospects relative to other economies. “The dollar is rallying, the US economy is doing quite well, and the US S&P 500 is also doing quite well,” said Simon Colvin, research analyst at Markit. “Investors are clamouring to get exposure.”

    Growth data released last week showed the US economy grew in the third quarter of 2014 at its fastest pace for a decade. But continental European economies continue to flirt with recession.

    The transatlantic divergence in economic fortunes was also reflected in ETF sales, with international inflows into European-focused funds last year equivalent to just 16 per cent of assets under management. Internationally-listed European ETFs had more than doubled in size in 2013.

    Even though inflows were still positive overall, the annual figures masked a sharp shift in global sentiment towards Europe during 2014. Initially, global investors saw the continent recovering from its debt crisis. But inflows into European ETF equities “faded as expectations for Europe’s economy deteriorated and deflation concerns emerged”, reported BlackRock in a separate review of 2014 flows. A weakening euro also hit global investors’ holdings.

    However a country breakdown by Markit showed Spanish ETFs showing the strongest growth in 2014 among established ETF markets, with Italian ETFs also expanding rapidly.

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    Russian ETFs also saw large inflows — although from a low base — underscoring how investors are using such products to place tactical bets. “No matter how bad the news got with the Ukraine crisis and the fall in oil [prices], investors kept adding to their exposure,” said Mr Colvin. India also proved popular with ETFs providing an relatively easy way to profit from Narendra Modi’s election as prime minister in May.

    By contrast, German ETFs saw large outflows, although the data were distorted by $10bn redemptions from an iShares fund based on Germany’s DAX share index, according to Markit. One explanation is the investors switched from German equities into safer European bond markets.