Global ETFs see record flows, US biggest gainer: ETFGI

According to Deborah Fuhr, Managing Partner & Co-founder of ETFGI, global exchange traded funds (ETFs) have seen record inflows, but India and emerging markets got only a miniscule share owing to hard landing in China. Most of these funds landed in US and Japanese markets, with US markets commanding a whopping 62 percent of total ETF inflows.  

While global ETF assets are worth USD 2.14 trillion and funds tracking India are just USD 5.6 billion, says Fuhr in an interview to CNBC-TV18 ETFs is a  very domestic product that investors use to tactically adjust their allocations, but net-net monies will stay in ETFs. "The trends in ETFs really represent what smart investors are doing, because the users of ETFs are asset managers globally, pension funds, sovereign wealth funds, financial advisors as well as retail," she adds. Also read: US, Japan to outperform emerging mkt: JPMorgan Below is the verbatim transcript of her interview on CNBC-TV18 Q: What your own observation has been in terms of trends through the May-June period with regards to Exchange-Traded Funds (ETF) both on debt and equity? A: Based on a report we recently published, looking at flows globally - we have seen record inflows through global ETFs. This year we have seen USD 108 billion of net new money going into ETFs and Exchange Traded Products (ETP) globally, compared to last year’s USD 81 billion. The money primarily is going into US equities. Money has been going into Japan, although that did stop quite recently, because many investors are concerned about whether the economic reforms in Japan are actually going to come through the way many had expected. There is also a concern that Quantitative Easing (QE) programs are easing, but the US market has taken in about USD 62 billion of net new money. We have seen investors looking for income in yields, so high dividend yielding benchmarks have also been appealing. The flows into emerging market (EM) equities have actually been negative, USD 5.2 billion. We have seen USD 19 billion going into fixed income exposure, mostly into short-term exposure, high yield and little bit of government. We have also seen that the commodity space has been under a lot of pressure. So, commodities, especially precious metals have seen outflows of USD 24 billion Year-To-Date (YTD) and that has primarily been in gold, in a bit in silver. The trends in ETFs really represent what smart investors are doing, because the users of ETFs are asset managers globally, pension funds, sovereign wealth funds, financial advisors as well as retail. So it is a very democratic product that investors use to tactically adjust their allocations. They also use ETFs for long-term core holding. Net-net we are seeing monies staying in ETFs, but they are tactically adjusting based on political and economic changes that are happening in the market. The concerns about China and hard landing is impacting investors' view on how many they want to overall have in EMs. Q: From your discussions with the whole universe of ETF managers or end investors, does it appear to you that the trend that you have described just now of US and Japan taking in most of the money and EMs losing it, could it get more accentuated or pronounced going forward? A: It really depends on the news coming out, because clearly things are changing almost daily. The concern about Europe has really declined over the past couple of months. When we saw concern about Europe, people were taking money out of Europe and reallocating it to other markets. So that is the beauty of ETFs; anytime during the trading day you are able to reallocate your assets if you feel that is an appropriate thing to do. I would say investors are looking to see what is going to happen with QE programs in various countries, what is going to happen in Japan and whether the economic changes are really going to be long-term beneficial. What we do find is for many EMs and Japan, when investors want to allocate they typically do so through ETFs. The reason for that is many investors do not have foreign investor status to invest directly in Mainland China, Korea, Taiwan or even India for that case and so using an ETF allows you to invest without having to apply for special status. The other challenge for many investors is it is hard to find active funds or individually pick stocks and funds that are going to do better than the benchmark, so using an ETF that gives you the index - if you can get your asset allocation right you can generate alpha through asset allocation as opposed to just trying to pick stocks or bonds or an active fund that is going to beat the benchmark. Q: The general perception in India at least is that the ETF flows tend to be quite volatile. We classify it almost in the hot money category. Is that too simplistic an assessment of the stickiness of ETF money? A: It definitely is. If you look at a very small segment of the market looking at ETFs providing exposure to India, you might view that as being a bit more volatile, because it is reacting to investors' sentiment towards India. Clearly, many investors use the ETF to gain exposure, and when they feel they want to redeploy. So you are looking at a very small slice, because ETF assets today globally are USD 2.14 trillion and the asset directly in funds tracking India are just USD 5.6 billion, so very small percent of the overall assets. When we look at the holding period for many investors they are now holding their ETF allocations for more than year. So it is not just buy and trade very quickly in a number of days but for many investors, they are core strategic investments, for the investors using ETFs. Whether that is a sovereign wealth fund, a pension fund, an asset manager, a financial advisor on a model portfolio or a retail investor - many are using things on a longer term basis. Q: What is your observation on what has happened with the debt side and for some of these EM bond markets? That is really where the pressure has been felt this last month as also on the EM currencies. Are you getting the sense that there is deep redemption pressure there still, or are people just holding extremely high cash levels as a safety net of sorts? A: Many investors are still sitting on a lot of cash. We have seen that the economic and political uncertainty across the markets, for a number of years now has caused many people to have pretty high cash levels. They have put a bit of money to work. When you look at EMs on the debt side, fixed income ETFs have only been around since early 2000 whereas equity ETFs have been around since 1990. So the array of products on the debt side is smaller and we have seen that that is a developing area, but the amount of assets in fixed income ETFs is much smaller than what we have seen in equities. So equity ETFs account for about 70 percent of all assets. There had been flows out of EM debt, but what I would say is many investors are holding onto some allocation, because using ETF is an easy way to get better EM debt exposure and there are not a lot of other ways for them to easily do so, so many investors are holding onto that as part of their model portfolio and not totally going into cash. That is typically the position you see that some people will reallocate, others will hold onto some allocation because clearly it is part of their long-term strategic asset allocation.