Exchange-traded funds remain one of the darlings of the investment world.
Usage by investors – both institutional and retail – remains high as ETFs seemingly navigate the balance between risk and reward as well as liquidity and yield. And as the sector continues to gain acceptance and more momentum, issuance continues with new underlying collateral – such as cannabis, cryptocurrency and so-called green initiatives.
According to the Investment Company Institute, estimated value of all ETF shares issued exceeded that of shares redeemed by $5.37 billion for the eight-day period ended July 11, 2018. People love exchange traded funds and product.
And it appears regulators do too. The Securities and Exchange Commission recently made an announcement that might have just juiced the ETF space now.
The nations foremost regulator just voted 5-0 in committee to ease rules for companies to sell low-risk ETFs without seeking its approval. The SEC hopes the move will lower costs of entry into the space and promote innovation.
While not set in stone, the proposed change still must pass muster with the industry via a comment period. Many ETF issuers operate under myriad different standards to bring issues to market and given the complexity involved, some argue that the current system favors some over others.
In its monthly commentary, ITG analysts wrote that changing the rule will indeed put smaller ETF providers on the same footing as larger ones and will likely lower the cost of creating new products.
Currently, ETF issuers must get SEC permission or exemptive relief, before selling funds.
And its not just U.S. regulators and investor that love ETFs – but across the Pond investors are also buying the sector. May was the second strongest month for Tradewebs European-listed exchange-traded fund platform since its launch in 2012 as fund flows showed a heavy turnover and rotation during the month.
Tradeweb Markets, which provides electronic trading for fixed income, derivatives and ETFs, said in an email that May was the second strongest month on record for its European-listed ETF marketplace since it launched in October 2012, with total traded volume of 22.4bn ($26bn).
Adriano Pace, head of equities (Europe) at Tradeweb, said in a statement: As the month drew to a close, platform activity accelerated amid heightened market volatility driven by political developments in Italy and Spain. More than 6bn was executed in the last three days of May alone, which translates into 27% of the entire monthly flow.
Detlef Glow, head of EMEA research at Thomson Reuters Lipper, said in his latest Monday Morning Memo that net inflows last month led to assets under management in European ETFs increasing to 663.7bn. Glow said the increase of 11.8bn from April was driven by both the performance of the underlying markets and net sales of 1.5bn. Equities had the strongest inflows in May last month, reversing the outflows in the previous month.
Glow added: This flow pattern drove the overall net flows up to 21.9bn for the year 2018 so far.
Back in the U.S., the most recent data showed the summer got off to a slow and dreary start in the sector. For a third month in 2018, US-listed ETFs posted net monthly outflows in June, according to the latest tally from State Street Global Advisors. The firm noted that this is the highest number of months with outflows in a single year for ETFs since 2008.
Yikes – but not really.
Matthew Bartolini, Head of SPDR Americas Research at SSGA, spoke with Traders Magazine about the data from the firms latest ETF Flash Flow report and how the month played out. Before throwing the baby out with the bathwater, Bartolini noted that while equity and commodity ETFs posted net outflows of $5.8 billion and $2.1 billion respectively in June, fixed income ETFs attracted a whopping $7.4 billion of inflows during the month.
This marks the 35th consecutive month of inflows for bond ETFs, he said. Fixed income flows were positive, led by government and short duration corporates, however, high yield posted outflows for the 4th month this year.
In looking at the entire month, Bartolini noted flows were muted as trade tensions rattled investor sentiment, pushing global equities negative for the year and prompting investors to rotate out of stocks. With the yield curve flattening to nearly 30 basis points, financial stocks witnessed the most sector outflows, followed by trade-impacted industrials. Yet, while growth is lower, it is still positive, he added, and, given equities dour performance so far, valuations are near long-term averages.
So, investors shouldnt turtle or call it a day, Bartolini said. Rather, its time to be more selective within equities in order to not get stuffed. Consider focusing on more fundamentally driven segments with persistent growth, such as technology. You might also rotate into areas that could benefit from the uptick in producer prices, such as materials or energy.
Financial advisors continue to favor exchange-traded funds while ignoring the nascent cryptocurrency markets – another high-profile asset class that competes for investor dollars.
This year marks the fourth consecutive year that ETFs are the preferred investment vehicle among advisers, with 87 percent of financial advisers surveyed currently using or recommending ETFs with their clients-the most popular investment vehicle among 20 options, according to a new survey by the Financial Planning Association (FPA), the Journal of Financial Planning, and the FPA Research and Practice Institute.
The survey was based on findings from Certified Financial Planners and professionals with half of those working as an independent IAR/RIA.
ETF usage has continued to climb over the last eight years when survey respondents first showed a significant jump in usage, with 72 percent using/recommending them in 2010 compared to just 44 percent in 2008.
The 2018 Trends in Investing Survey also showed that advisers continue to prefer a blend of active and passive management style (65%), which has been a consistent trend over the past five years. However, advisers are now showing a slightly higher preference for a purely passive approach moving from 15 percent of advisers in 2017 to 22 percent in 2018 who said a passive approach provides the best overall investment performance considering costs associated with each (active, passive, and a blend of the two) management style.
With only 200 active ETFs out a universe of nearly 5,000, the continued rise in advisers use of this investment vehicle is clearly congruent with the uptick in their adoption of a purely passive approach to investing, said Dave Yeske, DBA, CFP, managing director of Yeske Buie and practitioner editor of the Journal of Financial Planning. And while 65 percent of advisers continue to favor a blend of active and passive approaches, these results suggest that the ratio may be shifting in favor of passive.
The 2018 survey, which was fielded online in April and May of 2018 and received 265 responses by financial advisers of various backgrounds and business models, also indicated that 46 percent of advisers plan to increase their use or recommendation of ETFs with clients over the next 12 months – down slightly from 50 percent in 2017. No other investment vehicle showed this level of anticipated increased usage. For example, 19 percent plan to increase use of mutual funds (non-wrap) and 19 percent plan to increase use of individual stocks.
The following article originally appeared in the July 2011 edition of Traders Magazine
Stock Pickers Pick ETFs
By James Armstrong
The recent boom in exchange traded funds is likely to continue, as institutional investors are finding new uses for the instruments, according to a recent report from Greenwich Associates.
ETFs are often thought of as passive investments, but many institutions Greenwich surveyed said they now use them for active exposure to domestic and international equities. The study, sponsored by BlackRock, found 60 percent of investors use ETFs to add alpha through tactical application. “Over the past couple of years, we’ve seen increasing interest in using them in a more tactical, active fashion,” said Liz Tennican, head of institutional sales at BlackRock’s iShares.
Tennican said when ETFs were first launched they were thought of as institutional vehicles. Over the years, there has been tremendous growth in the use of ETFs by retail investors, she said, but now institutional use of the vehicles is picking up again.
Most institutions use ETFs for cash equitization, manager transitions, rebalancing and making tactical adjustments to portfolios, according to the Greenwich study. However, the survey found a growing number of institutions are also using ETFs for liquidity management.
ETFs can be a cost-effective way for institutional investors to capture beta exposure, while still maintaining the liquidity they need to meet redemption and contribution requests, Tennican said.
The Greenwich study was based on interviews with 45 institutional funds and 25 large asset management firms in the U.S. As a group, the surveyed institutions manage about $7.5 trillion.
Nearly half of the asset management firms surveyed said they plan to increase their investments in ETFs over the next two years, while not a single asset manager said it plans to cut back on ETF allocations in the near future.
Managers of institutional funds-including pensions, endowments and foundations-were also bullish on ETFs. Only 9 percent of those surveyed planned to cut back on ETF allocations in the next two years while 32 percent foresaw increasing their allocations.
The combined assets of the nation’s ETFs recently topped $1.1 trillion, according to the Investment Company Institute.
Laura Morrison, head of U.S. exchange traded products for NYSE Euronext, said the number of ETFs available is increasing rapidly.
Currently, there are more than a thousand ETFs trading in the U.S. Year-to-date, NYSE Euronext has so far had 107 new listings of ETFs in the U.S., compared with 63 for the same period last year and 25 over that period in 2009.
As more ETFs become available, institutions can use them for more purposes. According to Morrison, much of the growth in institutional use of the instruments is driven by the efforts of issuers.
“What we’re seeing is the issuers have been very focused on education, so that new institutional traders that have not been involved in ETFs are now engaging more than they were before,” Morrison said. Institutional traders are finding that ETFs are a quick way to gain broad exposure to the market in an efficient, low-cost way, she added.
Tom Smykowski, who heads ConvergEx’s global portfolio and ETF desk, said the report was not surprising. But this was the first time he had seen institutional ETF appetite documented. He said managers are now creating portfolios of ETFs to use as baskets rather than just as single-point exposures. He expects institutional use to double, perhaps as soon as by the year’s end.