The surprising news that EUR 5 billion flowed out of European equities ETFs in April isn’t quite as surprising as first thought when you know how to interpret the data. In fact it seems institutional investors looking to dodge the tax man were the culprits.
The staggering net outflows figure was reported by Reuters on Thursday of this week, citing figures from Global Insight ETF, with the conclusion that the move shows "The resurgence of concern about the euro sovereign crisis didn’t leave the ETF market unharmed".
But interpreting trading data by simply using headline figures without a more qualitative approach can be dangerous. The large outflows in April were predominately driven by the withdrawal of cash from just one single ETF. According to Morningstar’s own preliminary data, close to EUR 3.6 billion was withdrawn from the iShares DAX ETF, the largest ETF in Europe, between Tuesday April 24 and Friday April 27. Assets under management fell from EUR 12.3 billion on April 20 to EUR 8.7 billion seven days later.
So what to make of these startling figures? Were investors cashing in profits en masse? Were stop-loss orders triggered due to increasing volatility? Was the resurgent eurozone debt crisis particularly harsh on the German stock market? Was this massive redemption driven by thousands of unsecure investors?
The most likely explanation is none of the above. The simple fact that the dividend distribution date for the iShares DAX ETF is May 2 suggests it is fair to infer that tax-arbitrageurs were working their magic. Many large institutional investors probably sold their ETF shares towards the end of April ahead of the May 2 dividend payment date purely for tax reasons. In fact, according to Morningstar data, one day after the dividend distribution date the iShares DAX ETF experienced net inflows of around EUR 2.5 billion. So with tax concerns out of the way, institutional investors were likely flooding their cash back into the fund, thus boosting its AUM back up to EUR 10.9 billion.
Looking at other ETFs tracking the DAX 30 Index reveals another interesting story. With two exceptions, none experienced any abnormal fund flow patterns during this time. Both exceptions—fully replicated ETFs from ETFlab—experienced high inflows at the same time that the iShares fund was seeing massive outflows. During what was otherwise a normal trading week, sales of the two ETFlab DAX ETFs jumped on the same day, with combined net inflows of around EUR 500 million. Interestingly, according to our estimates, the ETFlab DAX Acc ETF’s AUM dropped again by EUR 200 million one day later. These simultaneous trends suggest that some large investors might have temporarily withdrawn assets from the iShares DAX ETF and, needing to find other similar (e.g. physical replicated) receptacles in which to park their cash, opted for the two ETFlab offerings.
The process of re-investment into the iShares DAX ETF is likely to continue over the coming days to possibly push AUM right back up to its pre-dividend date starting point. But European equity ETF flows data for April and May will remain distorted by this single impact. Outflows in April should be expected to be followed by similarly punchy inflows in May. In both cases, however, the reason will be nothing to do with fundamentals.
