The European ETF market in the second quarter of the year was marred by the combination of a plunge in money flows and capital losses against a backdrop of heightened volatility brought about by a mix of domestic (Greek debt crisis) and external (emerging markets) factors. Assets under management were on a rollercoaster, hitting an all-time high of EUR 463 billion in May before dipping to EUR 448 billion in June to end the quarter below the EUR 459 billion totted up in the first quarter of 2015.
According to our calculations, AUM in European-domiciled ETFs went back up to over EUR 460 billion in July. This implies that on top of the EUR 6.95 billion in net new money, the ETF market was also boosted by capital appreciation to the tune of EUR 5.2 billion over the month.
The breakdown of the data by broad asset class shows equity ETF holdings as the main contributor to the positive monthly outturn. After the second-quarter hiatus, and likely buoyed by the non-dramatic resolution of the latest instalment of the Greek tragedy in the form of avoidance of a Grexit, investors placed close to EUR 6 billion of net new money into equity ETFs. AUM in equity ETFs went up to an all-time high of EUR 318 billion by end-July from EUR 305 billion at the end of June.
The bulk of this new investment was directed to ETFs providing exposure to developed markets—Europe, the US and the UK—via mainstream indices such as the Stoxx50 and S&P 500. Meanwhile, emerging markets equity ETFs remained out of favour. The bad run for Chinese equities was a key factor. However, underpinning the flow out of emerging markets is the belief that the US Federal Reserve is about to tighten monetary policy. The negative implications of such a policy move on foreign direct investment in emerging markets have intensified of late, with investors increasingly looking to minimise exposure to emerging market currency-denominated assets.
After experiencing net outflows of EUR 1.5 billion in both May and June, fixed-income ETFs also came back in favour in July, gathering an estimated EUR 2bn in net new money. AUM was up to EUR 99.7bn from EUR 96.4bn at the end of Q2. As with equities, the non-Grexit confidence boost was instrumental in allowing for corrective positive moves on EUR-denominated fixed income assets.
However, this reprieve could prove opportunistic in nature. Indeed, relative to trends in the first three months of the year, total investment into fixed-income ETFs has diminished by a sizeable amount. Changes in ECB interest rates are not expected anytime soon. However, the much-touted decoupling between the eurozone and the US on account of their divergent monetary policy stances is not playing out. As a whole, investors are focusing on the US Fed. Besides, although still sub-par, the eurozone economic performance has improved and, perhaps more importantly, fears of sustained deflation have been priced out. This undermines support for EUR-denominated fixed income assets.
Elsewhere, investment flows out of commodities intensified in July, with an estimated EUR 0.96 billion in net outflows. The global downward trend for commodity prices is the key driving factor. In fact, AUM in commodity exchange-traded-products—including both ETCs and ETFs—has gone down to an estimated EUR 29.6 billion from EUR 33.1 billion at the end of June, thereby implying a fair degree of capital losses.
According to preliminary calculations, a total of EUR 6.95 billion of net new money was invested in exchange-traded funds over the month of July. This marks a strong start to the third quarter and helps assuage concerns of a continuation of the rather downbeat performance of the previous quarter.
Overall, seven months into 2015, total net flows into ETFs in Europe amount to EUR 42.3 billion. This is less than EUR 2 billion away from the EUR 44.1 billion amassed for the whole of 2014 and sets the ETF market in good stead to surpass the record high of EUR 51 billion from 2008.
