Dubai: The exchange traded funds (ETFs) are taking the global investment industry by storm as they set new record in net fund flows.
Assets in ETFs, one of the fastest growing businesses in the money-management industry, have increased about sevenfold over the past decade, not only because investors view them as easier to trade and cheaper than traditional mutual funds, but there are increasing volumes driven by speculators.
According to ETFGI’s [an independent research firm tracking ETF industry] Global ETF and exchange traded products ETP insights report for October 2015, there are more than 6,000 ETFs/ETPs with more than $3 trillion (Dh11 trillion) in assets at the end of October 2015. ETFs/ETPs listed globally gathered $35.6 billion in net new assets last month. This marks the 21st consecutive month of positive net inflows into ETFs/ETPs.
“We are on track to end the year with record net inflows and assets in the global ETF/ETP industry. In the first ten months of 2015 record levels of net new assets have been gathered by ETFs/ETPs listed globally with net inflows of $287.3 billion marking a 22.3 per cent increase over the prior record set at this time last year,” said Deborah Fuhr, managing partner at ETFGI.
Over the past few years ETFs/ETPs have been climbing in investment popularity chart because of the increased appeal of passive (index- based) investing. Each year passive investing claims an increasing share of investment assets because it is not possible for the average investor to outperform the market over the long term. Passive investing ETFs have gained share because they have lower management fees for small investors and significantly higher liquidity because unlike index funds they can be traded intraday.
Basket of investments
Over the past few years, the growth of ETFs is eating into the fund inflows into the competing mutual fund industry, which generally features actively managed funds with higher fees. An ETF is a basket of investments, which, like an index fund, mirrors an underlying sector or index. It can be broad, like a fund that mirrors an index, or narrow, like a fund that mirrors the performance of an industry/sector. ETFs usually have lower fees than actively managed mutual funds because they do not require investment research and have much lower transaction costs.
However, unlike index funds, ETFs can be freely traded by any brokerage firm. This has freed index fund issuers from the previous limitations of one-off distribution agreements with individual brokerage firms, and the associated myriad fees and subsidies. Thanks to this change we now have access to a broad, open platform of high quality, inexpensive index-based investments to choose from.
At the end of October, in the United States net inflows reached $174.8 billion, which is 12.4 per cent higher than the prior record set in 2013, while in Europe year to date (YTD) net inflows climbed to an all-time record of $68.6 billion, representing a 22.7 per cent increase on the record set YTD through end of October 2014.
Record
In Canada, YTD net inflows are at a record US$10.1 billion which is slightly ahead of the prior record set in 2012. In Japan, YTD net inflows were up 121.9 per cent on the record set last year, standing at $35 billion at the end of October 2015.
“Equity markets performed well globally in October: the Dow was up 9 per cent, the S&P 500 was 8 per cent, all 10 sectors of the S&P 500 were up for the month, developed markets gained 7 per cent, emerging markets were up 8 per cent. Investors put net money into riskier assets including emerging market equities in October,” said Fuhr.
The global ETF/ETP industry had 6,015 ETFs/ETPs, with 11,598 listings, assets of $3 trillion, from 271 providers listed on 63 exchanges in 51 countries at the end of October.
Last month, Equity ETFs/ETPs gathered the largest net inflows with $22.6 billion, followed by fixed income ETFs/ETPs with $14.5 billion. YTD through end of October 2015, ETFs/ETPs listed globally have gathered net inflows of $287.3 billion. Equity ETFs/ETPs gathered the largest net inflows YTD with $179.2 billion, followed by fixed income ETFs/ETPs with $78.7 billion and commodity ETFs/ETPs with $3.2 billion.
iShares gathered the largest net ETF/ETP inflows in October with $19.2 billion, followed by Vanguard with $7.5 billion, SPDR ETFs with $3.9 billion, PowerShares with $1.9 billion and Schwab ETFs with $1.2 billion in net inflows.
Differing views
ETF proponents claim better tax-efficiency, higher transparency, lower average fees, intraday liquidity, and insulation from forced buying and selling as strengths of ETFs.
Their detractors point out spreads, premiums and discounts, tracking errors, and difficulties with dividend reinvestment. This, of course, ignores the primary argument against ETFs — that speculators are far more likely than long term investors to use ETFs.
ETFs have come under growing scrutiny after August 24, when they contributed to a US market panic that at its worst erased about $1.2-trillion of market value.
Concerned by the growing risks of market distortions a number of institutional investors are already calling for regulation of ETF industry. Norway’s sovereign wealth fund last month said there’s a need for new rules to limit the risks spreading from the growth in exchange-traded funds.
ETFs vs ETPs
ETPs are best defined as open-ended investments listed on the exchange and traded and settled like shares. They are passive investments aiming to replicate the performance of a given market, generally by tracking an underlying benchmark index. Being generally open-ended investments, they usually trade at or close to net asset value (NAV). In some instances, ETPs may also be referred to as Exchange Traded Vehicles (ETV). Exchange Traded Funds (ETFs) are UCITS III compliant and usually track equity or fixed income market indices.
