That 2013 was a better year for investors than 2008 won’t surprise many. But until last year, 2008 boasted the dubious honour of having enjoyed the strongest flows into equity exchange traded funds (ETFs) on record.
Six years ago, equity ETFs worldwide swelled by more than £120 billion. That was their best ever 12-month period until 2013, when they attracted over £150 billion, according to the latest data from BlackRock.
By region, the most popular were US equity ETFs, which took in £90 billion. The next biggest winner, Japan, gathered £23 billion. European equity products took in £16 billion, more than twice what they managed in 2012. Emerging market ETFs, in contrast, dwindled by £6 billion.
Across all asset classes, ETFs had a good year but not a record one. In total, 2013 brought them £143 billion, slightly below 2012’s £160 billion but still healthily ahead of the £106 billion registered in 2011.
Equities clearly accounted for the bulk of last year’s new money, but perhaps surprisingly, fixed income was not a net detractor.
While flows did collapse from 2012’s £43 billion to £17 billion, that is respectable for a year in which the ‘great rotation’ entered the financial lexicon. The aggregate positive number, though, is solely attributable to the £22 billion that entered short-duration bond ETFs.
So rather than fixed income, the real drag on the headline figure for 2013 was gold. Gold ETFs shed an immense £24 billion last year, offsetting all their asset gains through the prior three years combined. That said, gold ETFs still contain £41 billion of assets. The largest, SPDR Gold, almost halved in size through 2013 but is still among the world’s largest ETFs at £19 billion.
More encouragingly, 2013 was a record year for smart beta. Some £40 billion, the highest amount ever and equivalent to almost a third of all inflows last year, was allocated to what BlackRock calls ‘strategic beta equity’, which it defines as non-market cap weighted indices.
Among these strategies, those emphasising income were heavily favoured for the second year in a row. Dividend-weighted funds reaped an almighty £18 billion in 2013, up from £8 billion the year before.
The second most popular strategic beta play was minimum volatility funds, whose assets more than doubled to £8 billion.
A similar approach to smart beta, buying sub-categories of broader indices, also reveals where investor sentiment lay last year.
BlackRock only details sector flows for the US, but there, financials were the preferred option. US financial ETFs were buoyed by an extra £4.6 billion in 2013, followed closely by industrials and technology on £3.8 billion each.
In only two sectors did investors withdraw money: £1 billion from utilities and £48 million from telecoms, the former in particular highlighting fears about bond proxies amid the tapering anxiety.
BlackRock expects 2014 to be another year of expansion for ETFs, with a prime driver being the fact that such products are still only a minute fraction of the investment market.
BlackRock estimates the size of that global investment landscape at approximately £116 trillion. Of that, ETFs hold £1.47 trillion. For comparison, mutual funds manage £12 trillion, while broader equity markets account for £38 trillion and bond markets £64 trillion.
An interesting observation on this point comes from Tim Edwards, director of index investment strategy at S&P Dow Jones Indices. He notes that this year, for the first time, global ETF assets are likely to overtake hedge fund assets. BarclayHedge puts the size of the hedge fund market at around £1.53 trillion.
‘Hedge funds search relentlessly to deliver on a promise of alpha while their privileged investors – supplying notoriously high fees and the tactical burden of illiquidity – hope to gain advantage from partnering with the 21st century’s investment titans,’ Edwards said.
‘Once the darlings of the asset management industry, hedge funds are seeing their pre-eminent status challenged by a diametrically opposite segment of the investment spectrum, as the cheap, liquid and transparent value proposition of ETFs continues to attract substantial investment from across the globe.’