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August 3, 2023

UK ETF Market Report: June 2023

by Dewi John.

Headline figures

£879.8bn

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

 

£3.36bn

June flows for the best-selling classification, Equity Global.

 

4.63%

Proportion of ETF flows accounted for by active vehicles, despite being only 1.3% of ETF net assets.

 

£8.3bn

Total estimated net flows for June.

 

£9.98bn

Average turnover of ETFs on the LSE in June—or 11.9% of total turnover.

 

£5.04bn

Net ETF flows going to BlackRock in June.

 

Assets Under Management[1]

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

 

Welcome to the first edition of Lipper’s monthly report on ETFs listed on the London Stock Exchange.

June saw investors continue to ponder the relative risks of inflation and recession, as the Bank of England’s Monetary Policy Committee stuck another 25 basis points (bps) on base rates, with expectations of further to go (which indeed came to pass in July). The UK still lagged the US, but was ahead of the ECB, which in turn had hiked by 25 bps that month.

These rate rises may eventually have the desired effect—if only by pushing the UK into recession, as higher mortgage rates for consumers and a greater cost of capital for corporates eventually take enough of a bite out of growth to turn it negative. Inverted yield curves—a historically reliable indicator of recession—are further adding to concerns, and recession, both domestic and global, was becoming a consensus position, especially in the face of anaemic growth in the UK and Eurozone. It also means that the bond market hasn’t rinsed out the bad news, in terms of duration risk, and the fanfare that the asset class ‘was back’ earlier in the year may have been a tad early.

Lastly, on rates and fixed income, those inverted yield curves will continue to make money market funds attractive relative to bonds for the time being.

The total assets of London Stock Exchange-listed ETFs were £866.19bn in June 2023: up slightly from £856.81bn in May and from £811.88bn year on year. Equity funds are, unsurprisingly, the largest asset type listed on the LSE (75.3%), followed by bonds (22.5%—see chart 1). The fastest growing asset type in relative terms is money market funds, which have grown 58.6% year on year despite still making up less than 1% of total net assets. Conversely, commodity and alternatives funds have decreased both absolutely and relatively over the year, as investors have chosen to move their money elsewhere.

 

Flows

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

Source: LSEG Lipper

 

Equity ETFs were the best-selling asset class for June, attracting £4.66bn, having seen inflows of £27.45bn over the 12 months till then, in line with the broader European market. Bonds, at second place for the month (£3.63bn), have nevertheless managed to pull in more than equities over the year, with inflows of £32.28bn. Both asset class’s takes are up in May. Other asset classes garnered small change in comparison: money market (£393m) and mixed assets (£39m). Alternatives (-£61m) and commodities (-£342m) saw outflows over the month. This is a little counterintuitive, as commodities is an asset class tipped to do well in a low-to-negative growth environment with high inflation, as are specific alternative strategies. Either no one has told investors, or they are finding other ways to get their exposure.

 

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

Source: LSEG Lipper

 

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

Equity Global was the best-selling classification of LSE-listed ETFs, in terms of European flows, pulling in £3.36bn, up from £2.28bn in May. This was followed by Equity US, with £2.55m. Investors are favouring dollar-denominated assets this month, with Bond USD Government taking £962m and Equity US Smid £399m. Bond Global USD, Bond USD High Yield and Bond USD took £610m between them. So, the dollar seems to be June’s specific trade, replacing May’s emerging markets play, where I’d hazard a guess that the theme was emerging market banks being ahead of the rate tightening cycle.

 

Source: LSEG Lipper

 

As is pretty much par for the course, top sellers in the classification were broad, large-cap indices. And, again as is often the case, ESG is making its presence felt, as Equity Global tends to be where the lion’s share of sustainable cash is squirreled away.

 

Source: LSEG Lipper

 

Interesting to see the top-selling Equity US ETF is an equally weighted S&P 500 ETF: while the tech monster stocks have made the running year to date, there’s clearly an appetite to get US large cap exposure while hedging bets on these richly valued stocks.

 

 

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

Source: LSEG Lipper

 

Equity Europe saw the larges outflows over the month, as the classification shed £713m. However, what’s most noteworthy is the number of Equity Sector classifications being sold down: Financials (-£485m); Energy (-£314m); Utilities (-£303m); Consumer Staples (-£202m); and Gold & Precious Metals (-£146m). Although ETFs are considered a good way of getting tactical sector exposure, the prevalence in—only—the bottom 10 is rather unusual.

I’ll just pick up on a couple here: investors may well be cooling on pro-cyclical Financials (though one can argue this either way, as higher base rates translate into higher bank margins). Utilities are inflation-sensitive, and the most bond-like of equity sectors, given the fixed nature of their revenues, and will be more negatively impacted by rising rates because of their higher debt levels. Think UK water companies and shudder.

Another area of note is the £202m outflows from Equity Sector Consumer Staples. At the other end of the table, just outside the top 10, Equity Sector Consumer Discretionary attracted £160m. This makes sense given current patterns of wealth distribution and market: while in periods of economic stress, Economics 101 would suggest that consumer discretionary takes a hit as households tighten their belts and direct their cash to the basics. However, the top decile is bearing up rather well, and the luxury goods market is booming. The market has bifurcated and, paradoxically, staples are struggling. Not everyone, suffice it to say, is eating cake, even within the supermarkets’ ‘basic’ ranges.

 

Trading Volumes and ETF Flows

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

Source: LSEG Lipper

 

The average traded value for ETFs in June was £9.98bn, which accounts for 11.9% of total London Stock Exchange average daily turnover. 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 and, to a lesser extent, UK government bonds. What is also interesting is that one of the only two UK equity funds in the table below is a FTSE 250 fund, perhaps reflecting concerns in this more rate-sensitive area of the UK equity market.

 

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, where US equities see the second-highest inflows following Equity Global.

 

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

Source: LSEG Lipper

 

As the active versus passive discussion has become a topic within the European ETF industry, it is worth analysing the sales and turnover numbers in this segment.

There are 52 active and 1,587 passive ETFs listed on the LSE, compared to 98 active and 2923 passive ETFs registered for sale in at least one country in Europe. This means that 53.1% of all active and 54.2% of all passive ETFs are at least cross-listed on the LSE.

Despite active ETFs only comprising 1.30% of total ETF assets, they took 4.63% of flows over June (although down from the 8.06% they took in May), indicating that investors are cottoning on to the fact that ETF does not equal passive, and that interest in active ETFs is picking up.

 

Of the total net flows of £385m to active ETFs over the month, JP Morgan took £441m, as is evidenced in the table below, with other promoters experiencing net outflows overall.

 

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

Source: LSEG Lipper

 

New Listings

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

Source: LSEG Lipper

 

With half the year gone, we’ve seen slightly more than a third of the funds launched when compared to all of 2023—although the pace has picked up a touch over the past month.

 

Source: LSEG Lipper

 

The main reason for this reduced level of activity is, as my colleague Detlef Glow has pointed out, that tighter monetary policies have meant that that seed money, needed by all ETF promoters, has started to evaporate as interest rates increased. Investment banks are making more on cash, which has somewhat suppressed their animal spirits, in that they do not need to take so many risks to get a significant yield back on their cash, so are less likely to use it for ventures such as new fund launches. Conversely, it has become more expensive for companies to borrow cash to use as seed money. The result is this more subdued new product launch environment.

Some ETFs were launched in June (see table below): 12 equity, one bond, and one commodity. As can be seen from the table below, the amounts garnered by all so far have been rather modest. Of note is that six have an ESG tilt: a suite of five from CIRCA5000, plus a renewable energy offering from Wisdom Tree.

 

Flows by Promoter

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

Source: LSEG Lipper

 

There are 28 promoters with ETFs on the LSE. Only six of these, however, accounted for flows of more than £100m in June.

BlackRock attracted the largest number of assets, at £5.04bn. Some £2.66bn went into bond ETFs, with equities attracting £2.26m over the month. Second-placed DWS saw £1.13bn go into equity funds and £147m to bonds, while Vanguard’s equity and bond ETFs attracted £897m and £299m, 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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