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January 16, 2024

UK ETF Market Report: December 2023

by Dewi John.

Assets Under Management[1]

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

Source: LSEG Lipper

 

LSE-listed ETF assets finished the year at £987.17bn, adding £179bn over 2023. On that basis, it shouldn’t be long before the £1trn barrier is broken.

Assets were up 22.2% year on year in December, driven by strong flows to equity funds (up 24%), which make up more than three-quarters of the ETF assets on the exchange. Indeed, all asset classes have seen year-on-year increases.

Money market funds have increased their share most over the year (up 59.1%), albeit from a low base. On the other hand, alternative ETFs are down to 79.4% of their December 2022 asset value—although, again, this is from a low base.

Equity funds are the largest asset type listed on the LSE (75.9%, slightly up on last month), followed by bonds (21.18). No other asset class constitutes more than 1%.

 

Flows

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

Source: LSEG Lipper

 

Total flows were £10.83bn (£100.83bn over 12 months): slightly down on November’s £11bn. The highest flows for the year were £12bn in July.

Equities continued their risk-on rally in December, further extending gains for Q4, and this was reflected in ETF flows. Equity flows were significantly up from November’s £7.28bn at £10.22bn (£68.85bn for the year). Bond ETFs slumped to £645m, compared to £3.74bn for November. Money market funds took £371m, and £3.54bn full year.

Commodities once again saw the largest outflows for the month (at -£368m) though were still up over 12 months, with £794m of inflows.

 

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

Source: LSEG Lipper

 

Equity Global and US have rotated as best-selling classifications, and in December it was again the US’s turn, nudging Global off the top spot, with sales of £3.9bn to £2.7bn, respectively. The US has been the best performing market over the year. However, if we combine Equity Europe and Eurozone, European equity sales take second place, attracting £2.93bn. Indeed, the month’s risk-on sentiment is well reflected in the five top-selling classifications all being equity—with Japan staying in favour (£830m), along with US Smid (£392m) and GEMs (£365m).

 

Source: LSEG Lipper

 

We’ve noted that in previous months investors hedged their exposure to the Magnificent Seven by buying equally weighted large-cap indexed products, this hasn’t been the case towards the end of the year. Indeed, where ETF investors have strayed away from the vanilla blue chip indices, whether US or Global, it has been for more of the same, but with an ESG twist (see tables above and below).

 

Source: LSEG Lipper

 

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

Source: LSEG Lipper

 

Bond USD Government funds sold off most heavily in December, shedding £1.02bn. Despite the relatively attractive yields in a world of tight spreads, investors have moved elsewhere. One could cite the weakening greenback, but that hasn’t stopped the rush to Equity US, so it seems more reflective of a repositioning to risk assets following earlier positive flows.

Equity sectors in redemption mode include Energy (-£621m), Financials (-£297m), and Consumer Staples (-£147m). Technology, discretionary, and industrials were top-performing industries on average across regions. In terms of sectors, according to FTSE Russell, over the year defensives struggled, posting losses or lagging in most regions. Foreign currency linkers also sold off a combined £372m, perhaps indicating investors now believe inflation has been tamed. UK linkers took a modest £4m this month, but this is a classification that saw investors badly burned as a result of duration exposure as inflation soared despite the intuitive expectation of inflation protection.

It’s tempting to see relative underperformance by UK equities and anaemic growth as driving continuing Equity UK redemptions (-£353m), but this is the mood music irrespective of conditions, driven by pension fund selling. The question is, when do we hit bottom?

 

Chart 5: Sustainable ETF Sales, (LHS, £m), and Estimated Net Flows (RHS, £bn), December 2023

Source: LSEG Lipper

 

Some £158.34bn of ETF assets on the London Stock Exchange are defined by Lipper Research as sustainable (see definition below), or 6.23% of total ETF listed assets. The bulk (82.6%) are equity, with 17.44% in bond vehicles. The merest sliver (0.01%) are mixed-assets, and if you can make that out on the bar chart above, your screen resolution and/or eyesight is much better than mine.

Over December, sustainable equity ETFs attracted £3.82bn, while their fixed income peers took £660m. As can be seen from the table below, flows mirrored the wider market, with investors favouring US, Global, and European sustainable equity ETFs.

The three top-selling sustainable bond ETFs were all Bond EUR Corporates, collectively netting about £650m.

 

Source: LSEG Lipper

 

 

The Sustainable section has a narrower and stricter focus than those which indicate some form of ESG strategy in their fund documentation—to a smaller group of sustainable funds, defined as all SFDR article 9 funds plus all Lipper Responsible Investment Attribute funds reduced to those containing indicative sustainable keywords in the fund name.

 

Trading Volumes and ETF Flows

Chart 6: 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 December was £9.96bn, which accounts for 14.28% of total London Stock Exchange average daily turnover. While the absolute number is down from November’s, as can be seen from the chart above, it’s a higher percentage—indeed, the highest for the year.

 

Source: LSEG

 

Chart 7: Active and Passive, Total Net Assets (LHS, %), and Estimated Net Flows (RHS, £bn), December 2023

Source: LSEG Lipper

 

There are 67 active and 1,656 passive ETFs listed on the LSE, compared to 83 active and 3,067 passive ETFs registered for sale in at least one country in Europe. This means that 80.7% of all active and 54% of all passive ETFs are at least cross listed on the LSE.

Active ETFs total net assets were 0.93% of the total. Active ETFs saw inflows of £544m, reversing two previous months of redemptions, with flows dominated by JP Morgan (see table below). Meanwhile, their passive peers attracted £9.7bn.

 

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

Source: LSEG Lipper

 

New Listings

Chart 8: New listings on the London Stock Exchange since 2004

Source: LSEG Lipper

 

There have been 168 launches year to date, and just five in December. While it’s not been a bumper year for launches, it still beats the average since 2010 of 156, ranging between 99 and 247.

Of the six December launches, three were Xtrackers funds, offering differing maturity exposure to T-Bills, as does Global with an ultra-short 1-3 month offering. HANetf and WisdomTree launches offer a diversion from the broad index vehicles that dominate flows, with a ESG-screened copper miners launch and a thematic “megatrends” play.

 

New Launches, December 2023

Source: LSEG Lipper

 

Flows by Promoter

Chart 9: 10 Best-Selling ETF Promoter for ETFs Listed on LSE, December 2023 (£bn)

Source: LSEG Lipper

 

There are 27 promoters with ETFs on the LSE. Four had flows of more than £1bn over December, and this seems to be a fixed pattern, although the order may vary, while eight of these accounted for flows of more than £100m. Some 17 of the 27 saw inflows.

BlackRock attracted the largest number of assets, at £4.75bn, compared to £6.33bn in November. Its most successful asset class was equity (£4bn). Second-placed DWS took £2bn, with £1.78bn in equity flows and £277m in bonds.

 

[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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