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What The Flows Show: A Year of Records for ETFs

January 9th, 2013

Dodd Kittsley: When investors look back on 2012, chances are many of them will remember all the economic uncertainty the world experienced – sluggish growth, the eurozone crisis, the fiscal cliff.  However, given the many records broken by the global exchange traded product (ETP) industry in 2012, investors may also remember using ETPs to help navigate the year’s uncertainties.

In addition to breaking the record for global annual flows, the ETP industry also saw record inflows in a number of regions and asset classes.  December collections of $39bn brought global net inflows for the year to $262.7bn total, just edging out the previous record of $259bn set in 2008 (another year of uncertainty, you may recall).  Inflow records were also set in the US, Canada and Asia.

Fixed income and emerging market equity ETPs were the big winners for the year, with both categories setting new annual flows records at $70bn and $54.8bn, respectively.  While most segments of the fixed income market saw growth, the higher yielding categories emerged as the year’s big winners.  Sectors such as investment grade corporate bonds, high yield bonds and emerging market debt all attracted large inflows, while US Treasury ETPs had outflows of $2.4bn.


Emerging market equity ETP flows ascended to a new monthly height of $11.7bn in December, helping the category achieve its record setting year.  Broad emerging markets ETPs ended the year on a seven month inflow streak, illustrating sustained investor appetite for the high growth potential these countries can provide.

So what do last year’s flows tell us about the future of ETP usage and areas of growth?  We think there are three key takeaways.  First, while the prolonged low interest rate environment persists, we expect to continue to see pronounced flows into equity income and higher yielding fixed income categories.  This also means a continued aversion to US Treasuries, as even a modest increase in yields would have a significantly negative impact on Treasury prices.  Second, with the problems of the developed world far from over, we’d expect to see continued interest in investments outside the US, particularly in the emerging markets category.  And third, while global growth is likely to surpass US growth this year, US companies with exposure to the greater global economy will likely still benefit, which could mean good news for US large and mega cap equities.

Sources: BlackRock Investment Institute, Bloomberg, National Stock Exchange (NSX)

Dodd Kittsley, CFA, is the Head of Global ETP Market Trends Research for BlackRock and a regulator contributor to the iShares Blog. You can find more of his posts here.


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