As one of the most liquid segments of the listed markets, the ETF industry is a litmus test of investor preferences…and they prefer safer assets.
The first tangible indicators of a change in demand for exchange-traded funds (ETFs) were recorded over the summer. De-risking in preparation for their endgame and rising fears of a trade war between the US and China, has seen global ETFs report their first outflows in more than five years.
In May, investors pulled some $4.5bn (£3.6bn) out of global equity funds, which reflected a similar decline in global equity indices. The S&P500 shrank -6.6% during that month while the MSCI World dived -6.1%. Simultaneously, bond ETFs reported $10.7bn (£8.6bn) of net inflows, according to data specialist ETFGI.
This trend has spread to the continent where promoters of European ETFs faced their first net outflows in two years. European ETF flows throughout August showed a clear rotation away from equities and into fixed income. Equity ETFs reported €12.2bn (£10.76bn) of outflows, while €3.3bn (£2.9bn) was moved into bond ETFs. This change in demand was more dramatic than the falls recorded in the underlying European equity indices. The FTSE100 had the weakest performance at -5% throughout August, however, other indices reported only a marginal fall. The S&P500 fell -1.8%, the Dax by -2% and the CAC by -0.7%. The total number of assets invested in the European ETF industry fell by 2.2% to $890bn (€786bn) at the end of August, ETFGI says.
Given that the European ETF market is dominated by institutional investors, it is perhaps not surprising that the fall in demand for equities tallies with a broader rotation of institutional money into bonds. Among UK institutional investors, domestic fixed interest government bonds and domestic inflation-linked government bonds are set to become the most popular asset classes, with about a third of investors planning to increase their exposure in the next year, according to Mercer’s asset allocation survey. Conversely, 24% of investors plan to reduce their exposure to domestic equities and 16% want to reduce their investments in equities across the globe