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What made 2013 a record year for ETFs?

by Robert St George on Jan 21, 2014 at 09:43

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.’

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