Industry giants agree 2020 was a record year for ETFs, with ESG coming out top of the charts

Vincent Denoiseux, Lyxor

2020 was quite the year for ETFs, as assets continued to roll in, and many firms predict that 2021 will continue on much the same course.

BlackRock notes in its Global Exchange-Traded Product Flows 2020 review that despite a rollercoaster year for sentiment, a record USD756 billion was added to global ETPs in 2020, surpassing the previous record set in 2017 (USD660 billion).

Looking at Europe alone, Bloomberg predicts that ESG may top 10 per cent of Europe's ETP assets with regulatory backing. According to Bloomberg Intelligence’s European ETP 2021 Outlook, ESG strategies could increase their share of European exchange-traded product assets to more than 10 per cent in 2021 from 8 per cent given a strong push by regulators and issuers in the region.

Bloomberg reports that ESG accounted for almost 40 per cent of Europe's ETP launches in 2020 and about the same share of industry inflows. “A record haul of 42 billion euros in 2020 helped assets in Europe-listed ETPs focused on ESG factors double to EUR84 billion, or about 8 per cent of the industry total. ESG strategies account for about 40 per cent of the year's ETP flows, Bloomberg says.

Lyxor also notes that ESG ETFs attracted the bulk of inflows in 2020, commenting that the ETF market proved resilient amid the global Covid pandemic.

Lyxor writes: “ESG ETFs attracted the lion’s share of all ETF inflows last year, gathering EUR45.5 billion, which accounted for more than half of the total inflow (51 per cent) representing more than twice the amount of assets raised during the whole of 2019.

The firm notes that ESG ETFs haven’t suffered outflows in any single month since the start of 2019. At the peak of market volatility in March 2020, Lyxor ETF Research found they proved resilient with positive flows of EUR400 million when the rest of the ETF market saw outflows of EUR26.2 billion. The firm found that limiting climate change is at the forefront of investors’ concerns, and Climate-ETFs gathered EUR2 billion, despite their novelty.

Amundi also reported the year’s flows, writing that while the Covid pandemic caused capital to be withdrawn from both equities and fixed income ETFs in March, 2020 finished strongly with total global in-flows of EUR666.7 billion, making 2020 the record year in terms of ETF flows.

Amundi reported that equities accounted for just over half of these flows at EUR358.2 billion and fixed income was EUR260.1 billion, while over 2020, Amundi estimates that European-registered Fixed Income ETFs registered EUR32.7 billion net flows.

Amundi also noted that two classes of products proved particularly popular among investors – ESG and sector/thematic ETFs with total in-flows of EUR36.1 billion – setting a new record for in-flows – and EUR21.2 billion respectively.

 

BlackRock’s global report found that equity flows recovered from a dip in March to gather USD410 billion for the year, spurred on by record buying after the US election in November. In fixed income, global flows matched the previous year’s total (USD257 billion), while the USD64 billion of inflows into commodity ETPs marked another record in a remarkable year for flows, the firm writes.

In what the firm describes as a barbell approach, strong equity inflows into the end of the year helped push the headline figures to a strong finish. Covid vaccine progress and the removal of political uncertainty following the US election drove large scale buying in November (including a record USD65.2 billion into US equities).

BlackRock writes that sector ETPs had a standout year with record flows across defensive and cyclical exposures –including technology, healthcare, industrials, energy and consumer discretionary –showing a barbell approach. As investors added back to risk in April and May, sectors benefiting from accelerated structural trends and quality characteristics proved popular. Healthcare ETPs gained a record USD17.1 billion of inflows across the year, while technology also stood out –inflows hit a record USD45.8 billion last year, more than the total flows into the sector from 2015-2019.

The firm notes that the barbell approach was also evident in factor flows: value and quality were the two most popular factors in 2020, with inflows of USD6.7 billion and USD6.6 billion, respectively. Headline factor flows fell vs. 2019, due to record outflows from minimum volatility ETPs (-USD16.8 billion vs. USD25.9 billion in 2019), which – coupled with the quality inflows – suggested a greater propensity for risk among investors, even in more defensive allocations, the firm writes.

The year was a year of tumbling records, BlackRock says. “Increasing flows into fixed income ETPs became a stalwart theme across our flow commentaries in 2020. Last year fell just shy of a record year for fixed income ETPs as investors took profits later in the year, but records did tumble within the asset class. Investment grade (IG) was far and away the standout exposure, with global inflows totalling a record USD73.6 billion –almost 30 per cent of all fixed income flows across 2020.

“USD47.9 billion of the IG inflows came between April and June –including a record USD21.2 billion in June alone –when investors allocated to credit with strong conviction off the back of central bank support. Similarly, high yield (HY) flows hit record levels in the middle of the year, although outflows from September-December tempered the headline figure to leave HY flows at USD24.8 billion for the year, marginally down on the 2019 total.

“The changing role of government bonds in portfolios led to the lowest inflows into rates in three years, with just USD31.4 billion added in 2020. This was partly driven by record outflows in November (-USD7.3 billion), as risk-on conviction really took hold. Meanwhile, allocations to inflation linkers increased more than fivefold vs. 2019 to a record USD17.5 billion, as investors adjusted portfolios to account for rising inflation as economies began to reopen.”

BlackRock notes that 2020 can be heralded as the landmark year for sustainable ETP flows, with US and EMEA-listed products gathering USD85 billion combined vs. USD28 billion in 2019.

“During market volatility in early 2020, sustainable flows remained resilient amid outflows from the broader market, with USD3.5 billion added to sustainable ETPs between mid-February and mid-March. Subsequently, EMEA flows remained flat through April and May, while US-listed products continued to see increasing inflows. Flows into EMEA-listed ETPs began to return to pre-crisis levels towards the end of May, however, and continued to strengthen throughout the rest of the year.

“November and December were record breaking months for EMEA-listed sustainable ETPs, with USD20 billion of inflows (38 per cent of the 2020 total), likely spurred on by the US election. Throughout the year, US-listed sustainable ETPs also raised money as a result of increased model portfolio allocations.”

Turning to emerging market equity flows, BlackRock says: “Emerging market (EM) equity flows –quite astoundingly –closed out 2020 flat, after heavy outflows earlier in the year were offset by significant buying as part of the broad cyclical rotation in the second half of 2020. Delving a little deeper, international investor conviction largely drove the positive side of the flows, with USD7.9 billion added to EMEA-listed ETPs and USD1.7 billion to US-listed ETPs, vs. USD12.4 billion out of APAC-listed EM funds.

“At the headline level, investors appeared to favour broad and regional EM exposures at the expense of single country ETPs –but this data is slightly skewed by outflows from APAC-listed single country ETPs. In fact, in EMEA, inflows into EM equity ETPs were fairly evenly split across broad, regional and single country exposures, while in the US there was a clear preference for single country ETPs. Countries in EM Asia, particularly China, proved popular among international investors.

“Flows into EM debt remained relatively stable over the course of the year, with investors favouring hard currency at the start of the year before tilting towards local currency into year-end. China and India proved the two most popular countries, with inflows of USD4.6 billion and USD2.0 billion, respectively (a record year for the latter). While flows into Chinese bonds were marginally lower compared to 2019, inflows in 2020 were almost exclusively into EMEA-listed products (USD6.2 billion), amid APAC-listed outflows –a stark contrast from the previous year.”

BlackRock writes that it was a record year for commodities, with record flows due almost entirely to precious metal buying, with record inflows for gold (+USD44.9 billion) and silver ETPs (+USD5.1 billion).

“As the pandemic spread earlier in the year, risk-off sentiment drove buying of precious metals. Inflows continued up until November, before gold and silver flows took a hit from increasingly risk-on sentiment, with record outflows of USD6.8 billion from gold in November,” BlackRock writes, giving a special mention to crude oil ETPs, which finished the year with inflows of USD11.5 billion, just shy of 2015’s record of USD11.7 billion. Increased oil price volatility led to large scale allocations in March and April (USD17.7 billion of inflows across the two months), which were partly offset by continuous outflows from June-December, the firm says.

Looking forward, Bloomberg predicts in its Bloomberg Intelligence’s European ETP 2021 Outlook that the European ETP market will see further fee cuts in 2021 while ESG is set to play a larger role due to regulatory tailwinds and growth in the number of products incorporating the strategies.

According to the Outlook, with assets now at more than EUR1 trillion and just 20 per cent in products at 10 basis points or cheaper, there is more room for fee reductions in the European ETP industry.

“Not only are new cheap products entering the market at a faster rate, but the fee reduction trend of existing products has shown legs in 2020 with more than 120 different products reducing their fees. The firm expects further cuts into 2021.”

Bloomberg recounts 126 instances in 2020 when the expense ratio was lowered for an ETF - 91 equity, 18 commodity and 12 fixed income. The fee cuts were rather aggressive, as the average reduction was 12 basis points. Collectively, these reduced products represent about EUR70 billion of assets and based on the reductions would amount to investor savings of about EUR61 million. The average size of a product that reduced fees this year was EUR525 million, suggesting some scale is needed before a reduction can be made, the firm writes.

“With assets in the European ETP industry now exceeding EUR1 trillion, Bloomberg Intelligence expects more fee reductions across the industry as issuers are now able to more aggressively compete for a bigger slice of the asset pie.”

Europe's ETP flows gravitate toward lower-cost products overall, but the cheapest bucket – priced at 10 bps or less - is accounting for only 13 per cent in 2020, the smallest share since 2017 and below the five-year average of 20 per cent, Bloomberg writes. Key drivers include growth of areas such as thematics and leveraged ETPs, where fees tend to be higher. Investors' cost obsession isn't as pronounced in Europe as in the US, where the cheapest bucket attracts over 60 per cent of industry flows, Bloomberg says.

“Further fee reductions could be aided by the fact that the European ETP market is showing signs of product maturity. The market had 293 launches this year, with only about half being brand new strategies while the rest were additions to existing share classes.”

According to Bloomberg, there are currently 53 ETP sponsors in the European market spread over EUR1 trillion of assets, yet 16 of these firms, or about a third of the industry, have entered the market within the past four years.

“In 2020, four different issuers entered the market for the first time, including Credit Suisse and Global X. As more firms look to join the market, we expect them to use aggressive tactics, whether through cheap offerings or differentiated strategies to try to stand out,” Bloomberg writes.

Commenting on ESG, Bloomberg notes that the European market share dwarfs its 1.1 per cent level in the US and could top 10 per cent in 2021 given a continued push by regulators, an influx of new products and broadened education and promotion by issuers. New EU rules require improved disclosures of ESG data, including benchmarks' ESG scores, and define standards for the category's products, the firm writes.

“ESG should remain a key focus for product-development teams in 2021, with expansion likely in fixed income, mixed allocations and traditional factor investing. Of the 293 ETPs that launched in Europe in 2020, 114 - or 39 per cent - focused on ESG. While overall launches were almost evenly divided between new strategies and additions to existing share classes, 77 of the ESG funds were new -- a sign that issuers are looking to aggressively capitalise on the category's growth. Fixed income was a key target, with 32 launches,” the firm writes.

Lyxor ETF Research comments that, overall, in an unprecedented financial market environment due to the Covid-19 pandemic, European ETFs gathered EUR89.3 billion (following a record year at EUR102.6 billion in 2019), representing 13 per cent of total funds’ flows (in line with their 13 per cent average through the last five years), the third largest annual inflow on record.

Lyxor reports that after a Q1 marked by EUR11 billion of outflows due to the outbreak of the pandemic, unprecedented support measures delivered by Central Banks across the world have fueled market momentum, along with a strong market recovery.

“Risk assets were supported, and flows poured back into ETFs: the European ETF market recovered EUR 100.4 billion inflows from April to December 20201.

“Equity ETFs captured EUR55.3 billion, the largest flows in 2020. After a phase of risk aversion and significant outflows at the outset of the Covid-19 crisis, more positive news flow – including the approval of several Covid-19 vaccines – supported the rally in risk assets and drove a cumulated EUR 34.7 billion into Equity ETFs across November and December 2020,” the firm writes.

“Fixed Income ETFs’ inflows reached EUR32.9 billion last year compared with EUR53 billion in 2019. Fixed income assets paid the heaviest toll to the Covid-19 induced market crisis, with record outflows of EUR-144.7 billion in March 2020 across fixed income funds and ETFs, but ETFs only accounted for 8 per cent of the total outflows, demonstrating their resilience even during the most turbulent phases of the market turmoil. Outflows were widespread across sub-categories. USD Government Bonds remained one of the few safe havens (gathering EUR120 million). Riskier sub-segments such as High Yield and Emerging Markets debt suffered very significant outflows.”

Vincent Denoiseux (pictured), Head of ETF Research and Solutions at Lyxor Asset Management, commented: “Investors’ appetite for ETFs did not wane during last year’s market turbulence with ETFs proving to be liquid and reliable ways to access markets, even when volatility was at its highest. The pandemic also highlighted the impressive growth in demand for ESG investments, with ESG ETFs continuing their evolution towards becoming new market standards having been perceived as niche products just a few years ago. Investors are increasingly aware of their effectiveness in shifting capital at scale towards a more sustainable economy. We expect this trend to continue in the coming years.”

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