ETFs continue to attract a broad base of global investors as investors seek efficient, tailored access to varied investment exposures and look for diversified buy-and-hold investment products. The global ETP industry posted another year of strong asset growth attracting $235.5billion. Although flows were volatile, total assets increased 23.5% to $2.4 trillion. ETF managers and investors may be interested to see the surprising trends that emerged in the 2013 ETP growth story.
1. ETPs listed in the U.S. grew faster than in any other region
Although the U.S. now accounts for 71% of all global ETP assets, it had the highest growth rate. Assets increased 26%, surpassing its three-year annualized growth rate of 19%.The Asia Pacific ETP market experienced similar growth as assets increased 23% and the number of ETPs available rose by 91. Europe managed low double digit growth while the Canadian ETP market expanded 6%.
2. Developed markets equity flows drove industry growth
Flows of $257.7billion into ETPs offering exposure to developed markets equities are nearly double the levels seen last year and eclipsed the previous annual record inflows of $180billion (from 2008). While other asset classes experienced outflows (commodities and emerging markets equities) or moderate inflows (fixed income), developed markets equities thrived.
3. Emerging markets equity flows remain in negative territory for the year
Emerging markets had been in favor for several years, holding up after the end of the financial crisis as interest rates remained low and growth expectations high. In fact, the category took in $55billion in new assets in 2012. However, the anticipation of an end to loose monetary policy in the developed world began to take hold in 2013 and acted as a catalyst that led investors to recalibrate expectations for emerging markets.
Growth rates for emerging market economies continue to outpace those of developed markets, yet in 2013 emerging markets equity indices underperformed developed markets by more than 25 percentage points and U.S. equities by more than 30.
4. Strategic beta equity captured nearly a third of industry flows
Strategic beta equity funds gained significant momentum in 2013. We define "strategic beta" as funds designed to track indexes that weight holdings by factors other than market capitalization such as dividends, volatility or factors (for example, momentum). Strategic beta equity funds gathered a record total of $65.1billion-nearly a third of this year's global industry flows - with asset growth of over 40%.
A rapidly growing area was minimum volatility, where assets have more than doubled over the year to $13.2billion.
5. Fixed Income experienced a duration rotation but kept growing
In early 2013, market concern over rising interest rates amid improving economic conditions and possible Fed tapering spurred debate over a potential great rotation out of bonds. The ETP industry did not experience a great rotation, but rather a duration rotation as flows shifted from longer- to shorter-maturity funds. Fixed income ETP flows of $27.5billion were down from last year's record-setting annual level of $70billion, but still strong. Short maturity products have steadily gathered $35.9billion while other maturities began to experience outflows in May and have shed ($8.3billion) year-to-date.
6. Demand and dollars invested in pan European ETPs reached all time highs
Pan-European equity ETPs surged in popularity on news the Eurozone emerged from recession in the second quarter of 2013. In addition to early signs of economic growth in the region, this category also benefited from relatively richer valuations for U.S. stocks, turmoil in Washington in the fall and the selloff in emerging markets this year. Second half flows totaled an impressive $27billion which compares favorably to the $2 billion gathered in all of 2010 and the redemptions of ($5.4billion) in 2011 when the debt crisis led investors to rush into safe-haven German equities.
7. U.S. retail investors amped up their ETP usage
ETPs are becoming more mainstream in the U.S. - particularly among individual investors. More than $20billion in flows this year came from individual investors and they now account for 13% of the U.S. ETP market. Combined ETP assets held by financial advisors, RIAs and individual investors increased 26% YTD through October to $1.1 trillion.
8. Gold outflows were a consistent and significant drag on industry growth
Gold ETPs saw outflows every month this year and assets declined by 52%. There were some upticks in the price of gold in 2013, and easy money policies continued in the U.S. and Japan, but low inflation remained a challenge for gold and rising real interest rates also caused headwinds. Gold ETP assets remain sizeable at $67.8billion globally making ETPs collectively the sixth largest holder of gold behind the IMF and sovereign nations.
All in all, 2013 was a successful year for the global ETP industry, in many ways exceeding expectations following record flows in 2012. Looking ahead to 2014 we remain confident that the industry still has ample room to grow. Investors and ETF managers considering ETFs in their portfolio should note that no matter what your investment objective, there's likely an ETF that can help you achieve it.
Dodd Kittsley is head of BlackRock ETP Research.