Investor inflows into exchange traded products can broadly be divided into two camps: those that look to use mainly ETFs in specific equity and bonds markets for some tactical asset allocation plays, and those that are looking for exposure to specific and niche areas of the market, particularly commodities.
David Patterson, head of UK wholesale distribution for passive investment products at DeAWM, notes: “Once equity markets bottomed out after the 2008 crash, the recovery has seen US equities in particular show tremendous growth. Anyone holding an ETF tracking the S&P 500 for the past five years would have done extremely well – the index is up almost 200 per cent since the market bottomed out.
“Last year that upward momentum in the US tailed off, although the second quarter of 2014 has seen another rally. As the US rallied post the crash, Europe remained muted as it dealt with its sovereign debt crisis, but in the latter part of last year and this year the European markets have been recovering. This has rewarded investors in ETFs tracking indexes like the Euro Stoxx 50 and the MSCI Europe.”
Equity ETPs seem to have been the favoured tool of choice for many, but the strong performance of the past few years could see a rotation away from equities similar to that seen in the mutual funds market.
Tim Huver, ETF manager at Vanguard, notes: “In terms of macro trends, what we have seen in 2013 is equity ETFs put in 2.5 times the cashflow of fixed income ETFs. But we’ve seen this trend reverse in 2014. For the year to date we have witnessed greater fixed income flows, although both equity and fixed income flows are well ahead of their pace of last year.”
This theme is supported by the figures from the May ETP Landscape report from BlackRock, which shows global fixed income inflows of $14.1bn (£8.3bn) in May out of a total of $20.8bn.
Meanwhile, having previously been significantly out of favour in the recent past, Neil Jameson, head of UK & Ireland at ETF Securities, notes commodities may be seeing a resurgence. He says: “We have seen people going into nickel and coffee and doing quite well, although they are quite tactical positions and not mainstream investments.
“More broadly we saw a lot of money going out of commodities as an asset class, and investors doing very well by rotating into equities, but now people are starting to question the extent to which equity markets can repeat last years performance. So we are seeing more interest in commodities as an asset class.”
Figures from the ETP Landscape report shows that commodities have continued to see outflows for the year to date to end of May, although the pace is slowing to just $0.3bn in May 2014.
It will be interesting to note how many themes of the passive ETP space will cross over into the mutual world in the second half of the year.
Nyree Stewart is features editor at Investment Adviser