More than US$2.7trn of assets are currently held in global ETPs, driven by record inflows into the growing market segment and increased adoption by institutions, intermediaries and retail across the US and Europe.
Fixed income proved to be a key driver of growth with US$78.6bn of assets flooding into the growing range of products, taking assets under management in those funds to over US$400bn – more than double 2010 levels.
The buyside giant – the largest issuer of ETPs through its iShares business – notes that demand for “safe-haven” products outstripped expectation as investors became increasingly anxious over global growth.
“Safe haven categories such as Treasuries, broad US fixed income and investment grade corporate debt fared the best despite low interest rates,” note BlackRock analysts. “Demand for income translated into healthy inflows for high yield corporate bonds, municipals and emerging markets debt.”
Although representing less than a quarter of total global ETP assets, fixed income is touted as the main driver of future growth given its relative under representation. Deutsche Asset & Wealth Management estimates that more than 2% of all global equity investment sits in ETF wrappers compared to just 0.3% for fixed income.
However, enticing traditional fixed income investors into listed equity securities isn’t without its complications. Basic problems surrounding the function keys on a Bloomberg terminal and unfamiliar data and analytics tools in the equity trading area of the terminal are being addressed in an attempt to ease the shift to listed alternatives (“Bond ETFs tackle logistical hurdles” IFR 2058).
Smarter way
Smart beta also enjoyed another successful year, with assets in funds weighted by factors other than market cap quadrupling since 2008.
Following a pivotal 2013, in which US$65bn found its way into listed funds linked to strategic indices, 2014 has attracted flows of US$51bn, driven in part by a proliferation of risk factor funds. Organic growth of 18% for smart beta ETPs was double that seen for market-cap weighted equity ETPs.
Dividend-focused funds, which offer an attractive alternative to fixed income given their superior yield, garnered over US$10bn. Volatility funds saw moderate inflows agains a sluggish volatility backdrop for most of the year.
Some believe that demand may be tilting back towards alpha generation given the underperformance of many smart beta funds through the recent equity boom (“Return to alpha as smart beta underperforms” IFR 2050). However, BlackRock expects a normalisation of volatility through 2015 to drive further interest in the products and minimum volatility ETPs to gain further momentum as a result.
The firm forecasts ETP assets will double to US$6trn over the next five years on greater utilisation of the products by banks and insurance companies as well as the expansion of the European retail segment.
“Regardless of the investment climate, ETPs are increasingly becoming viable alternatives to individual stocks and bonds, derivatives and mutual funds,” the firm notes in its report.
