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August 22, 2023

UK ETF Market Report: July 2023

by Dewi John.

Headline figures

 

£907.4bn

Value of all ETFs listed on the LSE, as of July 2023.

 

£2.27bn

July flows for the best-selling classification, Equity US.

 

1.85%

Proportion of ETF flows accounted for by active vehicles, down from 4.63% in June.

 

£12bn

Total estimated net flows for July.

 

£9.38bn

Average turnover of ETFs on the LSE in July—or 14.15% of total turnover.

 

£6.45bn

Net ETF flows going to BlackRock in July.

 

Assets Under Management[1]

 

Chart 1: Assets Under Management of ETFs Listed on the LSE by Asset Type as of July 30, 2023 (£bn)

Source: LSEG Lipper

 

July saw the Bank of England’s Monetary Policy Committee raise the base rate by a further 25 basis points (bps), in line with expectations. Whether there is further to go, and how much, will be largely dependent on the persistence of core inflation—which still seems sticky enough to worry the MPC—counterbalanced by GDP growth. That the yield curves of most developed markets are staying stubbornly inverted indicates that fixed income investors are not overly confident about the resilience of the latter. Indeed, overly aggressive rate rises by central banks could catalyse recession.

Storm clouds on the horizon there may be, but it was still a good month for asset gathering for LSE-listed ETFs. Total assets were £907.38bn in July 2023: up from £879.8bn in June and from £804.39bn year on year. Equity funds are, unsurprisingly, the largest asset type listed on the LSE (75.4%), followed by bonds (22.3%—see chart 1). The fastest growing asset type in relative terms is money market funds, which have grown 76.6% year-on-year despite still making up less than 1% of total net assets. However, the percentage growth flatters the asset class, as there was a dip in money market assets from June to July 2022, the rebound from which inflates the 12-month rate of growth.

Conversely, alternatives funds have decreased both absolutely and relatively over the year, with only 85.9% of their value from the previous July. However, on a month-on-month basis, all asset classes have growth their total net assets.

 

Flows

Chart 2: Estimated Net Flows in ETFs Listed on the LSE by Asset Type, July 2023 (£bn)

Source: LSEG Lipper

 

As implied by the increase in total net assets in chart 1, it was a strong month for inflows, at £12.03bn, well up on the previous month’s £8.31bn.

Equity ETFs were the best-selling asset class for July, attracting £6.06bn, well ahead of June’s £4.66bn. Bonds, at second place for the month (£5.09bn), have nevertheless managed to pull in more than equities over the year, with inflows of £36.32bn. The UK differs slightly from the broader European market for the month, where bond funds were the most popular.

While bond and equity are far and away the main games in town, it’s interesting to see commodity ETFs reverse negative flows, netting £372m for the month, a little behind money market funds, which took £518m. Alternatives, as noted above, continued their negative run, shedding £32m in July.

 

Chart 3: Ten Best-Selling Lipper Global Classification, July 2023 (£bn)

Source: LSEG Lipper

 

Of the 10 top-selling classifications in July, as with June, four were equity, five bond, and one money market—USD, with investors still, it seems, betting on a strong dollar and riding the Fed rate train higher.

Equity US and Equity Global were the best-selling classification of LSE-listed ETFs, in terms of European flows, pulling in a combined £4.39bn, up from £3.36bn in June, where Global was the best-selling classification. This was in line with broader European trends. Government bond funds, USD and GBP, took a nudge more than £2bn combined over the month. Favouring dollar-denominated assets continued into July from the previous month, taking £4.77bn of the £9.59bn flowing to the top 10 classifications. The table directly below indicates that this is going largely to the blue chips—unsurprising, given what’s been making the running in the return stakes—though, as in July, there’s one equally weighted tracker attracting significant assets, indicating not everyone wants to put all their eggs in the Magnificent Seven basket.

In addition, we’re seeing a continued favour for both emerging market hard currency (so implicitly USD too: £548m) and global EMs (£456m).

 

Source: LSEG Lipper

 

Interesting, if not especially surprising, is that three of the top five Equity Global ETFs (below) are ESG vehicles. Equity Global remains the focus for equity ESG funds by both flows and net assets.

 

Source: LSEG Lipper

 

 

Chart 4: Ten Largest Outflows by Lipper Global Classification, July 2023 (£bn)

Source: LSEG Lipper

 

One USD classification that hasn’t enjoyed popularity this month is Equity US Income, which has seen outflows of £254m. That seems a tad counterintuitive, given the general popularity of US equities and the elevated rate environment, which should work to the benefit of dividend payers. However, as US equity returns have been driven largely by tech leviathans, investors are being guided by market momentum rather than Finance 101.

European companies are not flavour of the month, with both bonds (-£210m) and equities (-£195m) shedding assets.

As was the case in June, investors are still expressing negative views through sector bets, though in July Energy, Utilities, and Gold & Precious Metals are out, while Real Estate and Communication Services are in. Interesting, too, is the £138m of redemptions from Bond USD Short Term. It’s been surprising that short-dated assets haven’t seen stronger allocations as rates hiked.

 

Trading volumes and ETF Flows

 

Chart 5: ETF Turnover (GBP m) and as a % of Total London Stock Exchange Order Book Turnover

Source: LSEG 

 

The average traded value for ETFs in July was £9.38bn, which accounts for 14.15% of total London Stock Exchange average daily turnover. That’s a lower absolute number than June’s £9.98bn, but higher in relative terms (11.92%).

When we compare top trades with flows by classification (chart 3), we get a sense of the difference between the broader pan-European market—reflected in the flows—and the more UK-specific nature of this section. What’s interesting is what they have in common: the tilt towards dollar-denominated assets, global equities and, to a lesser extent, European corporate bonds. As compared to June, there’s more of a UK equity presence, with a FTSE100 tracker in at number three.

 

Source: LSEG

 

The ETF with the highest daily turnover was an Equity US large cap vehicle, which is in line with the flows indicated in chart 3, as is the second-placed Equity Global ETF.

 

Chart 6: Active and Passive, Total Net Assets (LHS, %), and Estimated Net Flows (RHS, £bn), July 2023

Source: LSEG Lipper

 

There are 53 active and 1,608 passive ETFs listed on the LSE, compared to 107 active and 2,934 passive ETFs registered for sale in at least one country in Europe. This means that 49.5% of all active and 54.8% of all passive ETFs are at least cross-listed on the LSE.

While ETFs comprise 1.30% of total ETF assets, they took 1.85% of ETF flows for July. This, however, is sharply down from 4.63% of over July and 8.06% in May.

 

While total net flows of £223m went to active ETFs over July, JP Morgan took £269m, as is evidenced in the table below, with other promoters experiencing net outflows overall.

 

Table: Best-selling Active ETFs, July 2023 (£m)

Source: LSEG Lipper

 

 

New Listings

Chart 7: New listings on the London Stock Exchange since 2004

Source: LSEG Lipper

 

Over the first half of 2023, there had been only 70 new ETFs listed on the LSE, lower than the rate for 2022. That’s accelerated to 97, offering a (relative) bumper crop for July. HSBC has been busiest, claiming 12 of these, most being sustainable government bond vehicles, plus a trio of Chinese local government bond offerings (see overleaf for full table).

Some 15 of the launches are equity, 10 bond, plus one each of commodity and alternatives. Xtrackers’ launch of four ESG style exposures on the MSCI World—minimum volatility, momentum, value, and growth—seems worthy of note.

 

Source: LSEG Lipper

 

Flows by Promoter

 

Chart 8: 10 Best-Selling ETF Promoter for ETFs Listed on LSE, July 2023 (£bn)

Source: LSEG Lipper

 

There are 28 promoters with ETFs on the LSE. Nine of these accounted for flows of more than £100m in July.

BlackRock attracted the largest number of assets, at £6.45bn. Some £4.41bn went into bond ETFs, with equities attracting £1.14bn over the month. Second-placed DWS took £1.4bn, with 1.21bn into equity funds, while Vanguard’s equity and bond ETFs attracted £844m and £358m, respectively.

 

[1] This report covers all assets under management and estimated net flows for ETFs listed on the London Stock Exchange. This means while turnover and trading volume are measures that are taken per exchange, flows and assets under management can only be calculated on a pan-European basis, since most ETFs in this report are cross-listed on various exchanges.

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