21 January 2016

Mutual fund flows can provide a useful measure of investor sentiment – but figures often lag by a month or more. Exchange-Traded Product (ETP) flows represent a faster-reacting indicator – as figures of investors’ purchases or selling are only lagged by one or two days. Because of this feature, ETP flows have established themselves over the last few years as a barometer of investor sentiment many closely follow.

2015 was a record year for the both the Global and European ETP industry

BlackRock’s ETP Research unit analyse ETP flows to provide both our own investors and our clients with insight into what might be driving key investment trends.

2015 was a record year for Global ETPs – which gathered a record $351.8bn thanks to increasing fixed income adoption and record results for non-U.S. developed markets flows. Specifically, fixed income accounted for 27% of global ETP flows this year, representing 22% organic growth and eclipsing a record set in 2014.

The year marked a record for the European exchange traded products (ETP) industry too – for both equity and fixed income products. In fact, organic growth for ETP assets in Europe stood at 18% by the end of December – the highest growth rate in the past five years. 37% of all ETP flows in our region were into fixed income, as European investors in need of income bought investment grade and high yield debt products issued by European and US-based companies, attracted by the yield on offer compared to developed market government bonds.

Follow the liquidity

In equities, it was European equity trackers that captured the highest inflows in 2015 – both from global and European investors. What attracted investors to Europe in record numbers? Well, there can be little doubt that the diverging monetary policies of the Federal Reserve (Fed) and the European Central Bank (ECB) resulted in a shift in sentiment away from US equities and into Europe, where accommodative policy provided support for risk assets. Similarly, the Bank of Japan’s (BoJ’s) quantitative easing (QE) programme helped Japanese equity ETPs capture over $50bn of flows in 2015, globally – even if flows did slow when the BoJ failed to expand its QE programme in the second half of the year as some analysts had expected.

Currency matters

Another key trend in 2015 was the use of currency-hedging strategies: global currency-hedged equity ETP assets crossed the $100bn mark for the first time, highlighting just how important investors believed taking a view on currencies was for their portfolios. Given that currencies are one of the ‘transmission mechanisms’ for monetary policy, it seems likely currency decisions will be just as important over the next 12 months. We therefore believe the success of these strategies is set to continue.

As we move into 2016, the path for central bank policy globally looks less certain than it did in 2015: Fed guidance appears to suggest four rate hikes this year while markets seem to be pricing in two; ECB president Mario Draghi disappointed markets in December by dashing hopes that the Eurozone QE programme might be expanded.

Given the speed and ease with which they can be traded, and their high level of transparency, ETP equity flows will continue to be a key indicator of what investors think might be the next move for monetary policy.

Source: BlackRock, all data as at 15/01/2016.

CARS ref: RSM-2881
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 15/01/2016 and may change as subsequent conditions vary.

Fixed income accounted for 27% of global ETP flows this year, representing 22% organic growth and eclipsing a record set in 2014