Passive  

Passives' rise unhindered by geopolitical events

This article is part of
The Guide: passive investing

  • Grasp the importance of passive growth on the broader industry
  • Gain an understanding of recent and developing trends in the space
  • Comprehend the impact of passive flows on different asset classes
CPD
Approx.50min
Passives' rise unhindered by geopolitical events

Passive investing has gained traction in recent months in the wake of unexpected global events. 

It is perhaps no surprise that as investors have become more cautious in certain areas, the money flowing into passive approaches has increased dramatically. 

In tracker funds alone, figures from the Investment Association shows total fund under management in these products increased from £104.6bn in March 2016 to £148.9bn at the end of March 2017. 

But it is not just traditional tracker funds that have seen a boost: figures from ETFGI show global assets under management in exchange-traded funds (ETFs) and exchange-traded products (ETPs) reached $3.9trn (£3.03trn) at the end of the March 2017. 

The European ETF/ETP industry reached a record high of $658bn at the end of April. 

Figures from the BlackRock Global ETP Landscape report for April 2017 shows the global ETP industry has doubled in size in the past four years following inflows of $524.5bn in the past 12 months, while demand for fixed income funds continued with flows of $11.6bn in the month. 

Patrick Mattar, from the iShares Emea capital markets team at BlackRock, says: “For the seventh month in a row, flows into European-domiciled equity ETFs surpassed fixed income. The margin was, however, much closer than in recent months. 

“Emerging market debt inflows totalled $1.1bn in April, making it the largest flow category within fixed income – a position it has maintained every month so far this year.”

Meanwhile, Mark Weeks, chief executive at ETF Securities, notes: “Over the past 10 years there has been $300bn in new flows into passive products in Europe, whilst active funds have seen $30bn of outflows. The rush to benefit from the continued growth in the passive product industry has seen a proliferation of ‘me-too’ ETF solutions that simply replicate products already available on the market.”

However, he adds: “We believe we are now seeing a consolidation of flows, with the three ETF giants owning more than half of the industry’s total assets between them. 

“Total industry assets under management may double in the next few years, but we would speculate that 95 per cent of new flows will end up in the hands of existing providers, and in existing benchmark products.”

Another driver of the passive space has been the growth of so-called “smart beta” or factor investing products that offer different passive strategies to investors. 

Research from FTSE Russell highlights a new high in global smart beta adoption, with a growing interest in “smart sustainability and multi-factor indexes”. 

Its report, ‘Smart Beta: 2017 global survey findings from asset owners’, shows the percentage of asset owners reporting an existing smart beta index allocation increased from 36 per cent in 2016 to 46 per cent this year. 

In addition, about 41 per cent of those surveyed that are evaluating or using smart beta strategies “anticipate applying environmental, social and governance (ESG) considerations”. 

CPD
Approx.50min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. According to Mr Mattar, what has happened to the difference in inflows between European-domiciled equity ETFs and their fixed income counterparts?

  2. What products, in Mr Weeks’ view, have proliferated in the last decade as a result of passive industry growth?

  3. Which new trend for the passives industry has Peter Gunthorp pointed to?

  4. What has the global ETP industry done over the past four years, according to figures from the BlackRock Global ETP Landscape report for April 2017?

  5. How many companies own more than half of the ETF industry's assets?

  6. Which of the following has Mr Gunthorp not identified as a primary objective for the use of smart beta?

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  • Grasp the importance of passive growth on the broader industry
  • Gain an understanding of recent and developing trends in the space
  • Comprehend the impact of passive flows on different asset classes

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