The Weekly ETF Roundup: w/e July 24, 2020 - Thematic ETFs Are Having a Moment
Global markets began the week in positive territory on news of upbeat vaccine trial developments and the unanimous agreement among EU leaders for an additional €750bn in coronavirus recovery funds. However, stocks ended the week down as China tensions with US and the UK continued to heat up. The FTSE 100 dropped -2.60%, the FTSE 250 was down -0.46%, whilst the Stoxx Europe 600 saw a decrease of -1.43%. The DAX was also down for the week with a negative return of -0.63%.
U.S. equities were down -0.27% and the CSI 300 decreased -0.77% for the same period.
The CBOE Volatility Index moved up +0.62% from the previous week closing at 26.08 points.
WTI Crude oil closed last week at $41.34 a barrel, with a gain of +1.85% for the week.
Alerian, an American energy infrastructure MLP research provider, is set to launch its first European-listed UCITS ETF via white-label platform HANetf. The Alerian Midstream Energy Dividend UCITS ETF (MMLP) will be listed on the London Stock Exchange later this month and will be available in USD and GBP. Annual TER is 0.40%.
Amundi has expanded its core ETF range with the launch of the following two products offering exposure to UK mid and small caps and US Treasuries and track Solactive indices:
· Amundi Prime Mid and Small Cap ETF (PRUK) which is listed on the LSE and Euronext Paris, TER 0.05%
· Amundi Prime US Treasury Bond 0-1 Y UCITS ETF (PR1T) which is listed on the Deutsche Boerse and Euronext Paris, TER 0.05%
DWS has transitioned its Irish-domiciled ETF range from UK’s CREST settlement system to the ICSD model ahead of the UK's exit from the European Union. The shift comes after Euroclear UK & Ireland will no longer be able to provide central securities depository services for Irish-domiciled ETFs after the UK leaves the EU in March 2021.
According to BNY Mellon, some €61bn of Irish ETP migrations are set to complete by the end of this year leading to 96% of Irish ETPs using some form of the ICSD model. The move is part of a broader industry shift towards a single settlement structure for multiple exchanges. Source: ETF Stream
Paris-based Lyxor expanded its low-cost core range with a new fixed income strategy, known as the Lyxor Core Global Government Bond (DR) UCITS ETF will track the FTSE G7 and EMU Government Bond Index - Developed Markets, which is part of the FTSE World Government Bond Index. The new passive bond strategy will be listed on the London Stock Exchange and have a total expense ratio of 0.09%. Source: CityWire
UBS Asset Management liquidated two ETFs last week, a smart beta ETF and a US corporate bond ETF after failing to attract significant assets under management. The two funds that will close are:
· UBS ETF - Factor MSCI EMU Total Shareholder Yield UCITS ETF (UD05) which gathered only $6.9m assets since launch in September 2015
· UBS ETF - Bloomberg Barclays US Liquid Corporates Interest Rate hedged UCITS ETF (CUIH) which reached $8.7m since coming to market in July 2017
Flows and Performance
The $1.7bn WisdomTree WTI Crude Oil ETC (CRUD) suffered the second-highest outflows across all European-listed ETPs last week after OPEC and its allies agreed to increase oil production. CRUD, Europe’s largest oil ETP, saw outflows of $482m in the week to 17 July. In comparison, the United States Oil Fund (USO), the largest ETF trading crude oil futures globally, had outflows of $153.2million for the same period. Source: ETF Stream
BlackRock and Vanguard have topped the leader board of best-selling fund managers globally this year, benefiting as investors fled active investment houses in favour of inexpensive passive products. Invesco, Franklin Templeton, Pimco, T Rowe Price and Capital Group, which are best known for actively choosing securities, all suffered net redemptions of between $17.9bn and $32.2bn in the first six months of 2020, according to Morningstar. In contrast, BlackRock gathered almost $74bn across its mutual funds, with its iShares ETF arm accounting for the lion’s share of sales. Vanguard had net inflows of $67.7bn, while State Street Global Advisors had inflows of more than $20bn.
“The figures show a clear shift to passive managers, with iShares, Vanguard and State Street all benefiting from large inflows as more investors shift away from active fund managers,” said Ryan Hughes, head of active portfolios at AJ Bell. Amin Rajan, chief executive of CreateResearch, said: “The widely held belief that the active houses will outshine them in a period of market turmoil has yet to be supported by the data.” Source: FT
ETFs Shine During March Market Volatility
In an ETFTV interview, Dan Barnes and Deborah Fuhr interviewed Eric Pollackov, global head of ETF capital markets at Invesco about the main drivers behind recent investor confidence and flows into fixed income ETFs. From his perspective, inflows came down to the technology that the ETF wrapper provides as well as the Fed stepping in with their then plans to purchase fixed income ETFs.
Fuhr also asked how APs held up during the March market volatility. Pollackov replied, “For the volatility that was seen in both March and April, all of the authorised participants were still there, they had the ability to use their balance sheet to create and redeem ETFs in a way that was effective to keep the arbitrage mechanism available to the sell side participants that are making markets. I loathe to see the headlines sometimes around the fact that APs are stepping away from the marketplace because that is not what happened whatsoever in March”. Fuhr agreed and responded, “ETFs clearly busted a lot of myths about whether they are able to handle inflows and outflows -- the APs are there, and actually performed quite well year to date.” Source: ETFTV
The European Union is planning to roll back landmark regulations on securities trading and investment research, arguing that softer rules on the finance industry are needed to help the economy recover. MiFID II's “unbundling” rules have been criticized for removing the incentive for analysts to produce research, especially on smaller stocks that struggle to attract the attention of investors. Proposed new rules by the European Commission would allow payments to be re-bundled for research on fixed income markets and companies worth less than €1 billion. Source: Bloomberg
The Asia-Pacific index fund market is forecast to grow from $1.5trn to $5trn over the next five years benefitting the local ETF market. According to a Euroclear report, Hong Kong is ideally placed to benefit from this growth as there are a number of benefits within Hong Kong that investors may find appealing including: no capital gains tax, no income tax on dividends and no stamp duty tax on ETFs.
The Hong Kong Exchange is also introducing new measures to tighten spreads, improve liquidity and reinforce the market making function in an effort to increase on-exchange trading.
However, one of the biggest hurdles to the widespread use of ETFs in the region still remains -- retrocession. The lack of incentive for financial advisors to invest in ETFs versus mutual funds exists because finders-fees from asset managers to advisors are still permitted in Hong Kong. Source: ETF Stream
In the U.S.
ETF Price Wars
New entrants to the ETF market which launched innovative products with negative or non-existent fees have failed to gather significant assets, underlining the challenges facing smaller players in a competitive passive investment market.
The price war among index fund managers has prompted some providers to cut fees to zero in a bid to draw investor interest. A US based ETF launched last year went one step further by becoming the first fund to apply a negative fee, meaning that investors were effectively paid to invest. However, the ETF, offered by New York boutique Salt Financial, has now backed away from this strategy after attracting assets of just $9m in its first year.
While the Salt Financial ETF is the only fund to reverse its pricing strategy, four zero-fee ETFs launched by BNY Mellon and online personal finance company SoFi this year have gathered just $37m between them in the past three months, according to research company CFRA. Although there is no perfect equation which will guarantee success for now entrants, slashing prices and even paying clients to invest is certainly no panacea. Source: FT
Smart Beta Disappointment
Morningstar’s Director of Global ETF Research, Ben Johnson commented on his team’s latest report, “A Global Guide to Strategic-Beta Exchange-Traded Products,” which found that as of 12/31/19, there were 1,422 strategic-beta ETPs worldwide, with collective assets under management of approximately $1.09 trillion.
Johnson writes that the space is maturing as the pace of new product launches are slowing and fee competition is intensifying. “The crowded and competitive landscape will only continue to put downward pressure on fees” he says.
Strategic-beta products had a general lacklustre showing amid the market downturn, as most US listed strategic-beta ETPs underperformed their respective category indexes during the first five months of 2020. Every group (except commodities) performed worse, on average, than their category index. Source: ETF Express
At the close of trading in New York on Friday, bullion had climbed to $1,902.02 an ounce, 30% higher than the low it hit in March and just 1% off a record high set back in 2011. The virus has unleashed a long list of forces that are continuing to fuel demand for the perceived safety that gold provides.
The mania for gold right now has trickled down to Main Street. Retail investors have helped put ETF holdings backed by gold on track for an 18th straight weekly gain, the longest streak since 2006. Since the market bottomed on March 23, gold-backed ETFs have seen cumulative net inflows of $24.3 billion versus $19.7 billion for equity ETFs. This equates to 37% organic growth for gold ETFs over this span. Source: Bloomberg and Morningstar
Fund in Focus
Thematic funds seem to have done very well this year with decent returns, grabbing headlines, and inflows. Products ranging the span of everything from pet care, cloud computing, and artificial intelligence, to the newly launched “Work From Home” ETF (WFH) which has already accrued over $62 million since its launch on June 25th – these funds, well most of them, are here to stay. According to US-based ETF firm, Global X, assets under management for such ETFs are up 65% quarter over quarter. And the composition of the ETFs that have launched this year also tells a story. According to TrackInsight’s data, 36% of listings in the Emea region have been ESG funds and a further 19% have been thematic.
This brings us to our fund in focus -– the RIZE Cybersecurity and Data Privacy UCITS ETF (CYBR).
CYBR tracks the Foxberry Tematica Research Cybersecurity & Data Privacy USD Net Total Return Index which provides exposure to publicly listed companies that derive revenues from products and services that secure individuals and organisations against cyber threats.
Launched in February of this year, the annual TER is 0.45%. Assets under management as of Friday, the 23rd of July were $21.5m. Since its launch, the fund has returned +10.82% and since the March overall market lows, the fund has increased +54.24%.
People Corner: Fiona Basset
Fiona Basset has been selected to replace Manooj Mistry as DWS Investments' global head of ETFs and index investing. Based in NYC, Fiona joined DWS Group in 2004 and has succeeded in multiple leadership positions over her 16-year tenure. In her current role, Bassett develops and strategizes passive asset solutions for the company worldwide whilst also coordinating and managing active, passive and alternative products at DWS. In the US, DWS was also recently in the press for their recent win of “ETF Suite of the Year” and the “Newcomer ESG/Impact ETF of the Year” at the 27th annual Mutual Fund Industry & ETF Awards.
Fund Performance and Flows (data sourced from ETFLogic)
Top 3 Best Weekly Performers in the UK
WisdomTree Physical Gold – GBP Daily Hedged +4.97%
iShares J.P. Morgan USD EM Bond UCITS ETF USD – Acc HDG +3.84%
WisdomTree Cocoa +2.59%
Top 3 Worst Weekly Performers in the UK
iShares Nasdaq US Btec UCITS ETF -4.69%
Invesco MSCI Kuwait UCITS ETF -4.51%
iShares Core FTSE 100 UCITS ETF USD Hedged (Acc) -3.09%
Top 3 Weekly UK Inflows
iShares J.P. Morgan USD EM Bond UCITS ETF USD (Acc) +$71.0m
iShares USD Corp Bond Int Rate HDG UCITS ETF USD (Acc) +$62.9m
iShares USD Treasury Bond 1-3yr UCITS ETF USD (Acc) +61.0m
Top 3 Weekly UK Outflows
iShares USD Corp Bond UCITS ETF EUR Hdg (GBP) -$86.5m
Lyxor S&P 500 UCITS ETF – Dist (USD) -$40.7m
iShares USD Treasury 1-3yr ETF EUR – H Acc -$22.8m
*Fund in Focus or any portion of this newsletter are informational only and not intended to provide recommendations of any kind.