April 23, 2019

Did ETFs have a bad first quarter 2019?

by Detlef Glow.

Following the trade press in Germany and other European countries, I was quite surprised when I read the headline that net sales in ETFs were down dramatically over the course of the first quarter of 2019. By reading the article, I found out that the numbers the respective analyst was looking at were a comparison of the global ETF flows within the first quarter of 2018 and the first quarter of 2019.

Even as the statement of the analyst could be judged generally correct by looking at the numbers, one shouldn’t make these comparisons to simplify or overvalue the findings, since the markets do not think in quarters and, therefore, pay no attention to comparisons like the one above. Even as such a comparison takes into account that the different quarters of a year show different flow patterns, it needs to be said that quarterly numbers, as well as monthly, semi-annual or even annual ETF flow numbers, are often heavily impacted by the current market environment and the resulting sentiment of investors. The impact of the respective market environment gets higher when the measurement period is shorter.

It must also be taken into account that global numbers, like those mentioned above, can be heavily impacted by local or regional trends. This was the case with regard to the analysis mentioned above, since the reported global ETF flows were impacted by a slowdown in flows in the United States.

Strong inflows in ETFs in Europe

Opposite to the trend in the U.S., ETFs in Europe enjoyed strong inflows. Given the difference in size of the respective industries, it is not surprising that the inflows in Europe couldn’t offset the impact from the U.S. ETF flows with regard to the global ETF flows trend.

Graph 1: Overall Fund Flows and Quarterly Averages in the European ETF Industry (Euro Billions)

European ETF Flows

Source: Lipper at Refinitiv

In more detail, ETFs in Europe enjoyed inflows in every single month of Q1 2019, but witnessed a change in the underlying trends as equities dominated the flows in the European ETF segment for January and February. Meanwhile, bond ETFs were the best-selling asset type for March. With regard to this flow pattern, one could assume European investors wanted to participate in the recovery of the equity markets in January and February, and took profits in March. 

A simple but more sophisticated look at the quarterly flows shows inflows in ETFs in Europe over the course of Q1 2018 were way above the long-term average of quarterly flows, as well as above the highest average quarterly flows on an annual basis. These kind of observations, however, might help to distinguish the level of the flows, but do not add much value with regard to the overall trends. That said, one needs also to take into account the growth rate in the European, as well as in the global ETF industry, will slow down as the industry matures.

Even as the long-term trends seem to set a positive outlook for ETFs in Europe, a major change of the market environment can stop, or at least slow down, the positive trend in the European ETF industry immediately. Nevertheless, I am quite positive about the growth in the European ETF industry—even as a market crisis may appear—since European investors were buying, rather than selling, ETFs during periods of market turmoil in the past. That said, it is clear this past behavior may become a subject of change because an increasing number of investors use ETFs as short-term asset allocation tools and, therefore, may sell their ETF holdings as a tactical response to a rough market environment.

With regard to these predictions, it should be said that all assumptions on fund flows in the future are just predictions and, therefore, subject to change because no model or analysis can cover all market environments and the possible response of investors.

The views expressed are the views of the author, not necessarily those of Lipper or Refinitiv.

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