Worldwide, the ETF market experienced tremendous growth of more than 34% in 2017. Inflows hit a record high at $595bn1..<\/p>\n
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By Marl\u00e8ne Hassine Konqui, Head of ETF Research In Europe, Net New Assets also reached a record high at \u20ac94bn. Highlights were: <\/p>\n Equity ETF flows surged to \u20ac63bn, four times as much as 2016 <\/p>\n Developed market ETFs gathered the bulk of these inflows<\/p>\n European equity ETFs gathered nearly twice as much as their US peers, but failed to beat their 2015 record <\/p>\n Passive fund flows exceeded active funds globally, but the gap narrowed<\/p>\n 1: What went on in the ETF market in 2017?<\/strong><\/p>\n Worldwide, the ETF market experienced tremendous growth of more than 34% last year. AUM stood at $4,569bn. Unlike in 2016, net new assets also grew significantly ($595bn) in a risk-on market characterised by low volatility and low interest rates.1<\/p>\n Global ETF market hits new heights1<\/strong><\/p>\n Fixed income and equity assets, and inflows, reached an all-time high in 2017. Equity ETFs rallied to gather nearly threequarters of the inflows (72% or $427bn). This was double what ETFs in total achieved in 2016.<\/p>\n US equity exposures ranked first for inflows at $168bn yet declined by 7%. The real story lies elsewhere, with flows rebounding wherever you look. Flows into Asian equity exposures were up 97%, while among European exposures we saw inflows of $43bn vs. outflows of $39bn the year before. Emerging market equity exposures more than doubled to $49bn, Global ex-US inflows tripled to $76bn.<\/p>\n In fixed income, growth was more sedate (+21%) in the stillstable rate environment. Corporate bonds, developed and emerging market government bonds and aggregate bonds gathered the bulk of the inflows at $49bn, $20bn, $14bn and $24bn respectively. High yield and inflation products lost some ground as inflation risks declined and the risk return profile of the former became less attractive. In fact, high yield ETFs gathered less than half of what they did in 2016 at $6bn.<\/p>\n Globally at least, commodity inflows fell sharply below $4bn vs. $10bn in 2016, mainly due to precious metals with inflows of just $134m vs. $9bn in 2016.<\/p>\n Were the same trends apparent in Europe?<\/strong><\/p>\n Broadly, yes, both in terms of AUM and inflows. Inflows were more than double those of 2016, at \u20ac94bn and a whopping 31% above the previous record (set in 2015). Meanwhile, AUM increased by 23% vs. the end of 2016 at \u20ac635bn. ETFs hit new heights on all exposures, whether equity, fixed income or commodities. So it was, in fact, a record year for records! <\/p>\n Flows into equity ETFs increased most as they reached \u20ac63bn, which was four times as much as the year before and 39% up on the mark set in 2015. Developed market equity ETFs gathered nearly three-quarters of those flows to overtake their 2015 high by 31%, at \u20ac47bn. Emerging market equity ETFs also sprinted past their own record \u2013 set in 2016 \u2013 and nearly doubled in size to \u20ac8.6bn.<\/p>\n Flows into fixed income were again more modest but they were still up by 6% vs. the previous 2015 high. Investmentgrade corporate bonds gathered nearly 40% of the inflows (\u20ac11bn) in an environment of very low yields and still supportive ECB easing monetary policy. The hunt for yield supported emerging market debt ETFs, which hit new highs of \u20ac7.9bn helped by durably dovish Fed policy.<\/p>\n The outlier is commodities, where the global decline was arrested quite spectacularly. Commodity inflows in Europe rocketed past their 2016 record by 14% (\u20ac3bn). Broad commodities gathered two third of the inflows \u2013 and finished 20% up vs. their 2016 record at \u20ac2bn. Precious metals exceeded its 2016 record by 8%.<\/p>\n 2: Was it what you expected?<\/strong><\/p>\n Developed equity flows recover<\/strong><\/p>\n 2017 confirmed the turnaround in global economic conditions first hinted at in H2 2016 with the rebound of US growth. DM equity flows recovered robustly as a result. We saw the strongest trend reversal on European underlyings at \u20ac23bn vs. -\u20ac7bn in 2016 in a more positive economic environment. French ETFs registered record flows at \u20ac1bn boosted by Macron\u2019s new economic policy and reforms. European financial sector ETFs enjoyed record flows as did value and small-to mid-cap ETFs with \u20ac3bn and \u20ac6bn respectively as the reflation trade gained momentum. Flows into Japan ETFs also recovered strongly at \u20ac4bn (up from -\u20ac3bn) due to the possibility of an exit from deflation and the likelihood monetary policy would remain much easier than elsewhere in the developed world.<\/p>\n DM equities: \u20ac37bn up on 2016<\/p>\n EM equity flows continued to bounce back<\/strong><\/p>\n The Fed kept rates on hold for much of 2017, helping the return of flows in to EM ETFs first seen in 2016 to last a little longer. The trend even accelerated as rate rises remained limited and the Fed\u2019s tone stayed on the side of the doves. <\/p>\n EM equities: c\u20ac9bn \u2013 more than 2x what they were in 2016<\/strong><\/p>\n Lots of interest in corporate bonds In the low yield, dovish policy environment, investment-grade corporate bonds continued to attract real interest. They gathered 12% of total inflows, the highest figures in fixed income, with \u20ac11bn of NNA. Around two thirds went to the US (\u20ac7bn) while Europe gathered the rest. The risk reward ratio on the US IG credit market still appealed to investors while the soothing tone of ECB president Mario Draghi\u2019s statements boosted the sector\u2019s appeal in Europe.<\/p>\n IG corp bonds: Averaging \u20ac11bn for the last 3 years<\/p>\n Hunt for yield still at the heart of portfolio strategy<\/strong><\/p>\n Income-generating ETFs continued to gather significant inflows (\u20ac10bn), in line with their 2016 record. However, it was very much a year of two halves. Emerging market debt was the main winner with \u20ac8bn of inflows. Smart beta income generators attracted solid flows of around \u20ac1bn for a second successive year. High yield debt ETF flows slowed significantly to \u20ac1bn from \u20ac3bn the year before. The trend of deceleration was evident pretty much everywhere in H2, but most notably in emerging market debt where inflows of \u20ac841m in H2 were far lower than the \u20ac7bn in H1. Fears the Fed may raise rates faster played a part.<\/p>\n Yield hunters: Averaging \u20ac10bn for the last 2 years<\/p>\n 3: What were the main surprises?<\/strong><\/p>\n European equity flows increased but by less than we thought<\/strong><\/p>\n As anticipated, European equity flows rebounded strongly from \u20ac7bn of outflows in 2016 to inflows of \u20ac23bn in 2017. Yet this is still 39% below their 2015 record despite most other equity markets reaching new highs. Broad index inflows were \u20ac11bn below their record, while country ETF flows dropped by \u20ac6bn. Lack of confidence in the robustness of the recovery and some political uncertainties (Germany, Italy, Brexit) were partly to blame.<\/p>\n European equities: \u20ac30bn up on 2016<\/p>\n Global ETFs hit highs for DM & EM exposures<\/strong><\/p>\n The re-synchronisation of global growth and the high valuation of the US equity market triggered significant inflows into global ETFs. Overall, ETFs on the MSCI Developed World & MSCI All Country indices enjoyed \u20ac15bn of inflows vs. \u20ac9bn in 2016.<\/p>\n Global equities: \u20ac6bn higher<\/p>\n EM debt accounts for around a third of total fixed income inflows<\/strong><\/p>\n Emerging market bond ETF inflows hit a new high in 2017 at \u20ac8bn (nearly twice their 2016 level). That was nearly a third of all flows into bonds as investors took extra risk for a bit more yield given the Fed\u2019s generally dovish stance. The marked deceleration in Q4 was perhaps a sign of things to come.<\/p>\n EM debt: \u20ac8bn inflows, 30% of fixed income total<\/p>\n High yield goes into reverse<\/strong><\/p>\n After the record high in 2015, high yield ETF flows slowed to below \u20ac1bn in 2017. Less attractive risk return and fears of liquidity questions have weighed on sentiment.<\/p>\n High yield bonds: \u20ac2bn down on 2016 as sentiment changes<\/p>\n Sustained appetite for inflation-linked ETFs<\/strong><\/p>\n Flows fell below their 2016 high of \u20ac3bn, but inflation-linked ETFs were still in demand. \u20ac2bn of inflows mirrored what we saw in 2015. With the global economy recovering and the reflation trade gaining momentum, investors are hedging their exposure via ETFs through linkers or breakevens.<\/p>\n Inflation-linked: kept things steady with \u20ac2bn inflows<\/p>\n 4: What were the key trends?<\/strong><\/p>\n Short-term bonds win out again<\/strong><\/p>\n With the era of quantitative easing drawing to an end and widespread rate rises seemingly more likely, investors have started trying to find alternative ways of hedging their fixed income portfolio; short-term bond ETFs have proven popular given their reduced interest rate sensitivity. 2017 was (yet another) record high in terms of NNA for the asset class at \u20ac7bn.<\/p>\n Short-term bonds: a new record of \u20ac7bn as rates threaten to rise<\/p>\n Positive trend for thematic, sector and smart beta ETFs<\/strong><\/p>\n Globally, the growth of thematic, sector and smart beta ETF flows is very significant. \u20ac17bn of NNA in 2017 is a marked increase on the \u20ac11bn we saw in 2016. ETFs weighting or selecting stocks on microeconomic data are attracting more and more interest from investors looking for diversification and different ways to get more from their money in today\u2019s low yield environment. We still expect this segment to be one of the main growth drivers of the ETF market in the future.<\/p>\n Smart Beta\/Thematic\/ Sector: \u20ac6bn up as investors seek diversification<\/p>\n ESG\/SRI ETF flows have started to take off <\/strong><\/p>\n Flows into socially responsible investing ETFs grew significantly to reach nearly \u20ac3bn vs. \u20ac1bn in 2016 \u2013 which is in line with the growing interest investors have in sustainable investment. They still represent just a small part of the European ETF market in terms of assets (1%), but their flows represented 3% of total net flows, indicating the dynamism of this area.<\/p>\n Socially responsible investing: triples to \u20ac3bn<\/p>\n Currency hedged ETF flows are growing fast<\/strong><\/p>\n With volatility very low, the contribution of currency volatility as compared to the contribution of volatility of local currency returns, is growing significantly. This fuels demand for hedged ETFs, to the extent that AUM grew by 70% in 2017 to reach \u20ac35bn. Inflows were twice those of 2016 at \u20ac11bn, fuelled mainly by demand for USD to EUR Hedge and JPY to EUR hedge, and on risky assets (equities and yield seeking fixed income).<\/p>\n Currency hedged: ETF AuM grows by 70% in one year<\/p>\n 5: ETFs vs. Active: ETFs win, but results less clear cut<\/strong><\/p>\n Passive fund flows still exceed active funds \u2013 but the gap is closing<\/strong>.<\/p>\n In 2017 passive management flows were very dynamic at $890bn globally \u2013 a climb of 42% vs. 2016. They are still above those of active management of $766bn. Yet a switch back to active management in 2017 was apparent after a decline in 2015 and 2016. Fixed income active funds saw the bulk of the inflows at $530bn vs. $182bn in 2016. Overall equity active fund flows are still negative at -$85bn vs. $600bn of flows into equity passive funds.<\/p>\n In Europe<\/strong><\/p>\n Inflows across active and passive funds hit new highs of $640bn. Fixed income exposures gathered the bulk of the inflows with active management ahead at $245bn vs. $51bn for passive. In the equity space, passive management flows reached a record high and were still above those of active management ($99bn vs. $56bn).<\/p>\n In the US<\/strong><\/p>\n In the US, the picture is quite different. Nearly all flows into asset management go to passive funds ($635bn vs. $26bn). Equity active management continued to see significant outflows of $181bn vs. inflows for passive funds of $200bn. In fixed income, flows for both active and passive are rather limited.<\/p>\n Lyxor\u2019s own achievements in 2017<\/strong><\/p>\n Accomplished <\/strong><\/p>\n Far-reaching<\/strong><\/p>\n Dependable<\/strong><\/p>\n <\/span>Source: ETFWorld<\/p>\n","protected":false},"excerpt":{"rendered":" Worldwide, the ETF market experienced tremendous growth of more than 34% in 2017. 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