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September 12, 2023

UK ETF Market Report: August 2023

by Dewi John.

Headline figures

 

Assets Under Management[1]

 

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

Source: LSEG Lipper

 

Market participants are still transfixed by second-guessing central banks’ next steps: are there further rate hikes to go, and if so how much and when? Economic data is patchy, contradictory, and investor mood swings often make MacBeth seem a stable character. Consensus, so far as it can be judged, is that that if there are more rises to come, there won’t be much: 50 basis points tops. The S&P 500’s Magnificent Seven are still where the action is—for good or bad—in an otherwise thin equity market. As for bonds, there seems to be the least enthusiasm for the asset class in the ETF world for a good many months, as you can see below. Yield curves still remain stubbornly inverted, a likely harbinger of recession over the coming months.

Global equity markets fell over August, although rallying towards the month end. As a result, total ETF AUM on the London Stock Exchange fell from July’s £907.4bn to £902bn, despite net inflows (see chart 2), mirroring the broader European market. Despite the latter, total equity ETF assets were down from July’s £684bn to £677bn.

Equity funds are the largest asset type listed on the LSE (75.1%, slightly down on the month, despite seeing the largest inflows), followed by bonds (22.5%—see chart 1). The fastest growing asset type in relative terms is money market funds, which have grown 75.1% year-on-year despite still making up 1% of total net assets.

 

Flows

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

Source: LSEG Lipper

 

Total flows were £5.59bn—well down on the previous month’s £12bn—but clearly not enough to offset the shrinking of total assets as a result of market movements.

This subdued month saw only equity flows seeing much action, with inflows of £5.09bn. Bonds saw hardly any movement, with outflows of £12m: a considerable reduction from July’s robust £5.09bn inflows. The biggest single fixed income movement is almost £1bn being redeemed from a euro corporate bond ETF. Commodities enjoyed the second largest inflows of £452m, followed by money market funds’ £297m, almost mirrored by the £254m of outflows from alternatives ETFs.

 

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

Source: LSEG Lipper

 

As in July, August’s two top selling sectors were Equity US (£2.65bn) and Equity Global (£1.63bn). Despite the reduced flows overall, Equity US funds are at a comparable level with the previous month. There is growing anxiety that the Magnificent Seven stocks that have accounted for the S&P 500’s performance year to date have become something of a bubble, and as a result two of the five top US sellers are equally weighted vehicles, attracting £545m between them. And, despite all the heat around ESG investing Stateside, one of those equally weighted ETFs is an ESG fund, along with another indexed to the MSCI USA index.

 

Source: LSEG Lipper

 

On the other hand, while Equity Global is normally the home ground of sustainable investing, all the five top sellers are conventional funds—four straight large-cap indexed funds and the other a value index. Given elevated base rates, and despite the strong run for growth year-to-date (albeit with a narrow base—back to the Magnificent Seven again), the case for value remains and it’s understandable that many investors will be looking for alternatives to US big tech.

 

Source: LSEG Lipper

 

Investors are taking their commodity exposure through diversified exposure, with Blended funds netting £427m.

 

 

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

Source: LSEG Lipper

 

Bond EUR Corporates saw the largest outflows, at £823m, although there’s a fair bit of chatter among fixed income investors that these look reasonable value at the moment. With defaults climbing, the £289m outflows from its high-yield sibling is perhaps not so surprising. The second largest outflows were from Bond Emerging Markets Global HC (-£593m). Concerns that the Fed has further to go with rate tightening may still be spooking hard currency investors, although local currency funds also saw more than £100m of outflows.

IT (-£242m) and Financials (-£228m) also proved to be unpopular sectors, the former likely connected with the increasing favour that investor look on equally weighted S&P 500 funds in contrasted to tech-heavy cap-weighted index.

 

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 August was £9.18bn, which accounts for 13.74% of total London Stock Exchange average daily turnover. That’s a lower absolute number than July’s £9.38bn, and also lower in relative terms (14.15%).

Given that these figures reflect purely LSE-based trades, it’s unsurprising that we see a little more UK equity action—although only one UK fund in any asset class makes it into the top trades. Other than that, the top trades seem to be a reasonable reflection of the flows, both positive and negative, which are of a more pan-European nature.

 

Source: LSEG

 

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

Source: LSEG Lipper

 

There are 55 active and 1,622 passive ETFs listed on the LSE, compared to 103 active and 2,953 passive ETFs registered for sale in at least one country in Europe. This means that 53.4% of all active and 54.9% of all passive ETFs are at least cross listed on the LSE.

Active ETF’s total net assets increased to 1.37% from 1.30%, month on month.

Active sales were 12.63% of total sales for August, way up from 1.85% in July, and from June’s 8.06%. While aggregate flows were significantly down on the previous month, absolute sales rose from £223m to £706m.

JP Morgan took £570m, as is evidenced in the table below, with Pimco coming second, with £164m.

 

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

Source: LSEG Lipper

 

 

New Listings

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

Source: LSEG Lipper

 

There have been 113 launches over the first two-thirds of the year: a decided slackening of pace from 2022 FY’s 203. While July saw something of a flurry of launches, there were just 11 in August. As we’ve previously speculated, the likely reason for this is that tighter monetary policies has put the squeeze on seed money. Investment banks are making more on cash, suppressing their animal spirits, in that they do not need to take so many risks to get a significant yield back on their cash. Conversely, it has become more expensive for companies to borrow seed money.

Five of the new launches were bond, the other six equity. The four JPM launches are actively managed: unsurprising, given that the company is the most active in this corner of the ETF market.

 

New Launches, August 2023

Source: LSEG Lipper

 

Flows by Promoter

 

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

Source: LSEG Lipper

 

There are 28 promoters with ETFs on the LSE. Two had flows of more than £1bn over August, and nine of these accounted for flows of more than £100m in August.

BlackRock attracted the largest number of assets, at £1.04bn, down from July’s £6.45bn. The company netted £1.35bn over the month. Second-placed DWS took £1.04bn, with £764m into equity funds, while Vanguard’s equity and bond ETFs attracted £693m and £249m, 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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