Covid-19 crisis partly swept ETF concerns away
Says Jean-René Giraud, founder and chief executive officer of TrackInsight, the March 2020 crisis has addressed the three main investor interrogations upon exchange-traded funds (ETFs). These concern the resilience and the liquidity of ETFs as well as the alleged systemic risk those products carry. “The ETF market proved resilient during the turmoil as there has not been any major issue reported. The question of liquidity is not relevant as ETFs are just a wrapper. They provide the liquidity of their underlying assets and an additional liquidity layer when being traded. As for their presumed systemic risk, there is no consensus but the ETF market does not have the size to be a major source of systemic risk,” Giraud said while introducing the first European ETF & Indexing Forum, co-organised by L’Agefi and TrackInsight.
In the opinion of the panellists having succeeded Giraud, 2020 has been the perfect crash test for ETFs. And ETFs passed it with flying colours, reaching trading volume highs in March during the crisis but also in November in the aftermath of the US presidential election and the announcement of a future vaccine to combat coronavirus. Hence, ETF trading is up more than 50% in Europe in one year in 2020, pinpointed Vitold Berte, institutional trader at Flow Traders headquartered in Amsterdam. He specifies that for March only, Flow Traders has traded €174bn ETF-related orders, three times the amount registered in March 2019. “So far, we have seen the highest ETF trading days in November following the coronavirus vaccine announcement as it took markets by surprise,” Berte said. According to him, ETFs silenced critics around their resilience and liquidity, adding that the latter motive has actually drawn lots of investors in the ETF segment this year.
No net inflow high to be expected
A sign of the market confidence in ETFs has come from the Federal Reserve, recalled Deborah Fuhr, founder and managing partner of ETF data consultant ETFGI. “The Fed would not have invested for the first time in investment grade and high yield bond ETFs if ETFs did not work well,” she stated in reference to the bond ETF purchase programme initiated in May. Between January and October 2020, ETF net inflows amounted to $540bn globally, according to Fuhr’s estimates. In Europe, she said, the year has been “good but not great” as ETFs only drew $74bn in net subscriptions at the end of October vs. $89bn in October 2019. “We will struggle to reach the $125bn net flows of 2019 in European products. But that does not mean European investors don’t use them. In recent months, they invested in other ETFs either because of changes in market indices with the integration of Chinese bonds in several mainstream indices as from 2021 or because they played gold as safe haven to cope with inflation concerns,” Fuhr stressed. She highlighted another deep trend during the forum. Investors are shifting from market cap equity ETFs to ETFs embracing environmental, social and governance criteria or thematic ETFs playing current favoured themes such as disruptive technology or healthcare. “We also see country investments through ETFs in states that better deal with the Covid-19 coronavirus than others,” she said.
This ESG ETF frenzy reflected in strong net inflows at BlackRock’s ETF and index business iShares. According to Arnaud Gihan, director, France, ESG-compliant ETFs hitherto accounted for 40% of the firm’s ETF flows in 2020. Gihan also pointed an investor shift from broad-based indices ETFs towards more thematic and sectorial ETFs in order to play the wide equity market dispersion. Furthermore, Gihan noted that at last March market volatility’s pike, ETFs had been “the best tool to measure liquidity and the real value of assets, in particular on the credit segment.”
Unloved smart beta
As for institutional investors, some used ETFs to review certain exposures back in March – invest or divest quickly – or even to play short-term tactical allocation bets. It is the case of the French pension provider for professional flight crew CRPN. The fund’s deputy chief investment officer David Tomi mentioned some 15%-16% gains achieved through the purchase of ETFs replicating the MSCI Europe index during the March turmoil and their sale during the rebound. The pension scheme, using ETFs since 10 to 15 years, positioned on another ETF to play the recent equity value rally.
Thierry Brevet, general manager and CIO at Luxembourg-based insurer West of England, is more on a long-term stance about ETFs. If West of England rebalanced certain equity exposures at the heart of last March turmoil, ETF have been replacing active funds for a long time in the insurer’s equity core portfolio, forming 10% of the overall portfolio. West of England has moved into broad equity ETFs for “efficiency reasons” and does not consider a return on active funds. The institutional investor however pulled from smart beta ETFs. Brevet explained he was “disappointed by the gap between the academic research and the outcome.” “Some ETFs are too sophisticated, over-engineered. We prefer simple ETF tracking broad indices,” said West of England’s general manager who does not invest in fixed income ETFs neither because of “very stringent guidelines.”
The factor component has been disappointing for many but it is making a comeback through the recent value rally, assessed BlackRock iShares’s Gihan, who sees investors rectifying a few portfolio biases. In his view, 2020 also enabled to rectify ETFs image. “We do not use the ‘passive’ word anymore when we talk about ETFs,” he said.