Sticky money?

The first ETF in the UK was launched on the London Stock Exchange in 2000 and since then these products have built up a core following among retail investors and wealth managers. But what about institutional investors, such as UK pension schemes?

The Lens believes that a reason for the slower take up by schemes is in the marketing of ETFs as short-term trading products. “A fund that trades like a share” has been the common refrain from the ETF industry.

Schemes are, on the whole, buy-and-hold investors, so why would they want a product that is exposed to rapid outflows when the index it tracks heads downwards? Sudden retail panic selling based on market ‘noise’ could lead a pension fund into being the largest investor in a fund – a position they don’t want to be in.

But market volatility in 2018 suggests ETFs are evolving into longer term investment products. The Lens offers two pieces of evidence.

First, as European investment funds this year were hit by large outflows, ETFs stood firm. The mutual funds industry in Europe had overall net outflows of €22 billion in September (according to Efama data). But ETF sales in the same month were healthy. ETFGI, an ETF research house, showed net inflows to be at €5.6 billion.

Bond mutual funds saw redemptions of €10 billion – yet fixed income inflows to European-listed ETFs were the equivalent of €1.8 billion.

Secondly, colleagues at Funds Europe magazine held an ETF roundtable recently which heard that some ETFs are traded tactically in the short term. But in emerging markets, for example, although ETFs angled on these indices have seen short-term positioning this year, their overall asset levels have kept pace with the growth that ETFs have enjoyed in the past decade.

Also, there are some major asset classes where much more of a buy-and-hold pattern is evident – for example, corporate credit. One speaker said this asset class would be expected to show a higher level of turnover and tactical trading, but it wasn’t doing.

“The reality is that the portion of the market out there looking for high tactical allocations is relatively small and playing at the edges,” the panel heard.

Thematic funds do show more evidence of short-term exposure and other funds might show swings at some point in the market cycle (European banks recently). But the Lens will tentatively argue that long-term investors entering the ETF market are on more solid ground today than they once were.