What The ETP Flows Show: Risk Dial Still On
Dodd Kittsley: On the heels of a record-breaking December, global exchange traded product (ETP) flows continued to experience incredible momentum in January, surpassing the milestone figure of $2tn for the first time and finishing the month at $2.04tn in total assets. This was the industry’s best January ever, with $40.2bn in inflows (breaking last January’s record of $33.5bn).
In addition to the blockbuster numbers, January also mirrored December in the decidedly risk-on nature of flows. Equities accounted for 94% of flows while the fixed income category remained subdued. While all equity segments attracted net inflows, emerging markets (EM) ETPs ‘emerged’ as the trend to watch. Broad EM ETPs drew in $7.0bn, the highest monthly total for the category in more than three years. EM single country ETPs also saw strong inflows of $5.8bn, with investors favoring China, South Korea and Mexico exposures.
For those looking to make a more tempered transition into riskier assets, ETPs offering “minimum volatility” strategies have been a vehicle of choice. These products, which offer a way to access equities with the objective of reducing risk in the form of market volatility, have seen significant inflows in their relatively short lifespan, from ~$1bn at the end of 2011 to nearly $7bn at the end of January 2013. January inflows alone for minimum volatility ETPs weighed in at $0.8bn.
Another interesting story on the equity flows side was the resurgence of dividend-oriented ETPS, which had experienced outflows in the build-up to the fiscal cliff last month. With tax uncertainty no longer a barrier, dividend products staged a comeback in January, gathering $2.9bn.
Risk was also a trend within fixed income, where investors favored high yield bonds to the tune of $0.8bn in inflows. In contrast, the ‘safe haven’ Treasuries category posted outflows for the second month in a row amid concerns that improvements in the US economy could put upward pressure on yields.
Will this risk-on behavior continue? January market activity has certainly prompted some analysts to believe we’ve entered a period of “Great Rotation” from bonds into stocks. However, Russ Koesterich believes – and I’m inclined to agree with him – that while we are seeing some investors rediscover equities, the reality is that it may take a while to see the massive shift that some are anticipating. Rather than one smooth movement, it’s likely to be more of a grudging, volatile process. Meanwhile, we do still advocate a long-term positive view of equities (you can get Russ’s most recent investment outlook here).