European-listed equity ETFs have seen positive inflows of €4.6bn between July and September, the first quarter of positive inflows this year, as investors rushed to US large caps and emerging markets. Almost half of the flows went into smart beta funds, according to the Morningstar Direct European ETF Asset Flows Update – Q3 2016.
Jose Garcia-Zarate, Associate Director of Passive Strategies Research for Morningstar.
Emerging market equities saw inflows of €3.3bn in Q3 as investors chased positive momentum in the asset class. Jose Garcia-Zarate, Associate Director of Passive Strategies Research for Morningstar, said in a statement that investors have taken a more “sanguine” view about the risks of emerging markets throughout this year.
“The likelihood of a growth slowdown, as foretold by forecasters back in 2015, had long been priced in, whereas investors are now taking heart from signs that the worst of those predictions may not come to pass,” he said.
According to Ursula Marchioni, Chief Strategist, iShares EMEA, emerging markets’ year-to-date global inflows are at their highest level since 2012.
“The emerging markets asset rally could have more room to go, as a tactical play,” she said. “This is due to the gentle Fed rate hike path as well as structural improvements within emerging economies, coupled with relative calm in the oil and Chinese markets.”
Garcia-Zarate also notes that investors in Europe are seeing the strength of the US market compared to home, even if stock valuations may look steep. European investors ploughed more than €2.5bn into US large cap ETFs over the last three months and, on a global scale, US ETFs gathered $58.4bn (€53.6bn) in Q3, according to BlackRock.
“And yet [despite appearing overvalued], from a qualitative standpoint, they still seem to trump a European equity market dogged by key fundamental risks, most notably with regards to the health of its banking system,” said Garcia-Zarate.
US and emerging market inflows buoyed equities overall, as the asset class continued to be dogged by outflows across eurozone equities, including single country funds. Investor sentiment is particularly low in Germany due to problems affecting its banks, with investors pulling more than €1.5bn from German ETFs in the third quarter, the report found.
In the UK, however, FTSE 100 and MSCI UK ETFs have been boosted after Brexit by the fall in Sterling, which has propelled profits for multinational corporations domiciled in the UK as they convert their revenues into sterling. The £864m UBS ETF MSCI United Kingdom UCITS ETF (LON: UC64) is up more than 16% since 1 January.
Third quarter flows across all asset classes of European-listed funds reached €17.9bn, more than double the €8bn registered in the second quarter and pushing total assets under management to €513.4bn.
Other asset classes still clawed in more money than equities. Fixed income gathered €8.5bn, bolstering total flows to €23.1bn since the start of the year. (Investors have favoured emerging markets and corporate bonds in a world of low yield).
Commodity exchange-traded products also gained €4.9bn in net inflows between July and September as investors were driven to buy gold due to Brexit concerns.
Equity ETF assets still dominate overall assets in European-listed products, holding €318.2bn at the end of the third quarter, yet equities suffered net outflows until the end of June due to a choppy New Year and negative investor sentiment regarding Brexit.
Not all providers have benefited from the turnaround in equity flows. While iShares has attracted 56% of net new money over the first nine months of 2016, investors have pulled more than €2.8bn from db X-trackers, with more than half of that over the last three months alone, according to Morningstar. The outflows may be due to the problems affecting Deutsche Bank, whose investment arm acts as the swap counterparty for its synthetic list of ETFs. It is still the second largest ETF provider in Europe.