How ETF flows reflect geopolitics

After several years of equities’ uncontested domination, the wider variety of fixed income ETFs now available offers a new source of diversification.

Looking back at 2010, adoption rates of equity ETFs among institutional investors were around 90 per cent of the total investable universe, while those of fixed income ETFs were only around 45 per cent.

Equity adoption rates remain around the same levels today, while fixed income rates have increased to 65 per cent.

In other words, part of the linear progression of fixed income flows in 2019 is a reflection of investors’ movement towards low-cost, transparent ETFs.

While this reallocation is still happening in equities, the pace is more rapid for fixed income vehicles thanks to the increasingly diverse range of products. 

The reactivity you need

The rapid turnaround in the fortunes of equity ETFs as investor sentiment shifted also illustrates the use of these strategies as a tactical investment device.

Some investors may be using ETFs as a way to take advantage of short-term trends.

But for institutional investors, these strategies offer a way to participate in a trend that emerges over the course of a few quarters.

Pension schemes and insurance companies are in some ways similar to slow-moving tankers.

Changing the course of investment allocation takes time; investment committees need to be consulted and new strategies have to be selected.

Allocating to ETFs allows these investors to relatively quickly take advantage of an emerging trend, while they decide on a longer-term course of action.

New flows here to stay

Despite the rising demand for equity ETFs in last quarter of 2019, flows to fixed income ETFs did not decrease.

In other words, net new assets into equity ETFs did not come from a shift in demand, but from net new subscriptions, with investors increasing their existing allocation in ETFs or with new investors joining the market.

The European ETF industry attracted record net new assets of more than €100bn in 2019.

Irrespective of short-term trends in ETF flows, volumes into these strategies are expected to increase further in the next few years.

The popularity of these funds will be driven by their utility as low-cost, transparent core asset holdings.

In addition, ETFs are well-suited for making tactical allocations in response to short-term macroeconomic trends, as they are easier to use compared to more traditional fund structures.

Fannie Wurtz is global head of ETF, indexing and smart beta at Amundi