ETP Landscape: Market sentiment drives rare outflows

– Starting on May 22nd, Ben Bernanke’s remarks about the Fed tapering its bond buying program set global investors into flight from a variety of asset classes..……

– Many of these investors turned to ETPs to execute their investment views, resulting in net outflows in June of ($8.2bn), along with elevated ETP trading volumes.

– ETFs accounted for 31% of all trading volume in US equity markets in June, up from 20-25% in recent months.
– Emerging Markets (EM) Equities saw redemptions continue in June with ($6.6bn).
This is the fifth consecutive month of outflows for EM Equities following months of substantial inflow.
– Fixed Income ETPs saw monthly outflows for the first time since December 2010.
Investors continued to move to shorter duration ETPs, which attracted $5.5bn in June. Other Fixed Income maturity categories saw outflows of ($13.5bn).
– Gold ETP redemptions continued in June – a six month trend to date – with ($4.1bn) of outflows, bringing YTD outflows to ($28.2bn).
– Developed Market Equity ETPs continued to attract new money, adding $11.8bn in June which is down from May’s level of $30.3bn, but on par with April flows of $13.2bn.

Global ETP Overview

Global Overview
Market sentiment shifted on May 22nd when Ben Bernanke articulated that the US Federal Reserve bond purchases could soon taper and markets were again impacted by additional comments he made on June 19th. ETPs saw outflows following both announcements, showing that investors use ETPs as readily available, precise, efficient exposure tools to express market sentiment.
Investors sold Emerging Markets (EM) Equities, Gold, and Fixed Income ETPs in June, with the first two categories building on an outflows trend from prior months and the latter breaking from a trend of previous inflows. Investors continued to purchase Developed Markets (DM) Equities.
– Sentiment had shifted early in the year in favor of Emerging Markets Equities which started strong with $10.9bn of flows in January when investors embraced risk assets across the spectrum. In February, concerns over economic growth in China and other Emerging Markets came to the forefront and EM Equity ETPs began to see outflows which have continued through June and now total ($10.4bn) YTD.
– Investors began trimming their exposure to Gold in January and outflows have continued all year, particularly because inflation fears have subsided.
– Flows into Fixed Income ETPs remained positive every month this year until June. The bulk of YTD flows went into short maturity funds as investors began positioning early in the year for rising interest rates. Fixed Income outflows occurred following Bernanke’s May 22nd announcement.
Short maturity funds drew in additional June inflows of $5.5bn, but all other maturity categories saw combined redemptions of ($13.5bn).
– On the flip side, monthly flows into Developed Markets
Equities have been constant with the category attracting $115.7bn YTD led by US exposures with $71.0bn. June flows of $11.8bn were moderate compared to May’s level of $30.3bn, but on par with April flows of $13.2bn
• The S&P 500 index YTD return was 12.6% vs. the MSCI EM Equity YTD return of -10.9%, with June alone at -6.8%1

ETP Liquidity and Trading
June saw orderly trading of ETPs which delivered liquidity under stressed market conditions, as designed.
As market volatility increased this month and in previous periods (see chart below3) driven by specific news that impacted investor sentiment, we have seen elevated ETP trading volumes in absolute dollar terms and also in proportion to total US equity market trading volumes. ETFs accounted for 31% of the dollar value of all trading volume in US equity markets in June, up from 20-25% in recent months.
A key feature of ETPs is on-exchange liquidity during periods with rising or declining securities prices. As ETP trading volumes rise, more ETPs change hands between sellers and buyers.
– In US markets for example, High Yield Bond ETPs saw elevated trading volumes of more than $25 billion in June which is up more than 100% over March levels. This is a positive outcome for sellers as they found on-exchange buyers for High Yield Bond ETPs at a time when underlying bond prices were declining.
– The majority of trading in ETPs occurs on exchange without new share creation or redemption. In June, the value of shares traded on exchange for High Yield Bond ETPs was five times greater than the gross daily flow activity in the funds, meaning many transactions occurred between buyers and sellers without triggering creates or redeems.

Monthly Overview
Global ETP outflows in June totaled ($8.2bn). It was the first month of outflows since November 2011 when redemptions were ($0.1bn), which was then followed by three consecutive months of inflows averaging $21bn. The record for monthly outflows was January 2010, when we saw ($13.4bn) of outflows.
– June represents a reversal from May when flows reached $25.6bn. Key themes in May were the acceleration of flows into Japanese Equity ETPs, shifting investor preference within Sector Equities for more economically sensitive categories, and more robust flows into Intermediate-Maturity Fixed Income funds.
– Japanese Equity ETPs followed up last month’s record inflows of $10.3bn with additional asset gathering in June of $2.8bn despite a 1% drop in Japanese Equity markets. The Bank of Japan’s ETP purchases totaled $1.6bn during the month.
– Short-Maturity Fixed Income flows accelerated to $5.5bn from May’s level of $2.6bn, this despite total Fixed Income outflows in June of ($8.1bn). Short-Maturity Treasury and Investment Grade led flows in June as investors reacted to recent FOMC comments regarding an upcoming slowdown of bond purchases. Investor appetite for intermediate-maturity funds waned in June as investors pulled out ($2.3bn) as compared to May which saw inflows of 4.2bn.
– US Sector Equity flows slowed to $1.1bn this month as compared to May when these funds gathered $5.1bn.
– Gold ETP redemptions were ($4.1bn) in June compared to ($5.9bn) in May, bringing YTD outflows to ($28.2bn).

Year-To-Date Overview
Year-to-date global ETP inflows dropped below the $100bn mark in June
– YTD net flows of $96.3bn are below last year’s record-setting pace due to June outflows. In the first half of 2012, ETP industry gathered $105.5bn of inflows.
– Equity funds led with more than $105 billion of YTD inflows which is more than 80% above last year’s pace of $56bn.
– US and Japanese Equity exposures account for the bulk of the year-over-year Equity flow growth. Both equity markets have been bolstered by accommodative Central Bank monetary policies.
– The growth in year over year Equity flows was mitigated by EM Equity outflows of ($10.4bn) YTD. The category had seen strong inflows in January of $10.9bn and then shifted to outflows from February through June.
– Short Maturity funds (Floating Rate, Ultra-Short-Term and Short-Term) have been the engine for Fixed Income flows this year, accumulating $23.1bn. Last June, the duration picture was completely different with YTD inflows of $3.5bn for Short Maturity funds.2
– Gold and Fixed Income funds are driving the year-overyear decline in flows.

Flows By Listing Region
– Funds listed in the US account for 71% of global ETP assets.
– YTD 2013 flows into US-listed products represent 76% of the global total compared to 71% for full-year 2012.
– ETP assets in the US have grown 6.4% YTD.
– Asia Pacific and Canada gathered net inflows this month, despite the market volatility.

ETPs and Mutual Fund
Monthly Flows
– Developed Equity mutual fund flows have shifted from outflows in 2012 to net inflows in 2013. Inflows declined during the first 5 months and reversed to negative in June. Year-to-date, Developed Equity mutual funds have drawn in $60.1bn while Developed Equity ETPs attracted inflows of $115.7bn.
– Emerging Markets Equity flows were strong in January 2013 for both mutual funds and ETPs and have been declining over the last five months. Year-to-date, mutual funds have gathered $17.2bn while Emerging Markets Equity ETPs flows turned negative with ($10.4bn) for the year.
– Fixed Income flows had been steady for mutual funds in the first 5 months in 2013. In June, both mutual funds and ETPs suffered redemptions. Year-to-date, mutual funds have gathered $113.9bn while Fixed Income ETPs drew in


Source: – BlackRock ETP Research

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