ETF Market Growth Slows, Cash Flows Hit Record

According to a new report from Deutsche Bank’s ETF research and strategy team, the assets invested in exchange-traded products (ETPs) globally grew by only 3 percent last year, a marked decrease from recent years in the rate of the market’s expansion. Measured in terms of cash inflows, however, ETFs attracted a record US$164 billion of new assets from investors in 2011.

The apparent contradiction between these two pieces of data is explained by market movements, says Deutsche Bank. Declining equity prices counteracted investor inflows, resulting in a modest rise in global ETP assets from US$1.44 trillion at the end of 2010 to US$1.49 trillion at the end of 2011.

By region, Asian ETPs saw the fastest growth, as measured by new cash flows, says Deutsche Bank. Last year’s investor inflows reached 24 percent of the previous year-end’s assets under management figure. In the US ETP market, cash inflows added 13 percent to the previous year-end’s assets, while Europe lagged, at 8 percent.

This represents a reversal of the trend seen in previous years, where European ETP assets grew at a faster rate than in the more mature US market. “The European [ETP] market was impacted—especially in the second half of the year—by uncertainty driven by credit and euro stability concerns in the region and also, to a smaller extent, by negative regulator comments about ETFs,” Deutsche Bank observes in its report.

For 2012, Deutsche Bank predicts global ETF cash inflows will represent 12 percent of year-end assets. When combined with a modest 5 percent forecast increase in global asset prices, the bank anticipates growth of 17 percent in worldwide ETP assets this year.

By asset class, equity funds dominated the cash inflows to ETPs in 2011, with US$103 billion of new cash entering funds offering long exposure to shares. Fixed income ETFs attracted US$49 billion of new assets, while commodity ETPs gained US$7 billion of new cash.

These inflows disguise quite different investor preferences by region, however. In the US ETF market, the lion’s share of new assets went into funds offering exposure to domestic shares, particularly those with a focus on dividends, says Deutsche Bank. In Europe, investors were big buyers of German shares and of gold trackers, while in Asia ETF purchasers preferred Japan.

ETFs also scored well by comparison with non-listed mutual funds, says Deutsche Bank, with exchange-traded trackers continuing to increase market share. US ETFs received inflows nearly three times higher than the mutual fund industry, which is larger by a factor of ten, while European ETF cash flows were 120 percent bigger than the total UCITS mutual fund sector, which outweighs ETFs by a ratio of 30:1 in size.

At a global level, the position of the top three ETF providers became even more entrenched in 2011, Deutsche Bank figures indicate. The combined market share of BlackRock/iShares, State Street and Vanguard reached 71.3 percent at the end of 2011, up from 70.6 percent a year earlier.

Vanguard and State Street increased their market share to 12.6 percent and 16.0 percent, respectively, from 11.3 percent and 15.4 percent at the end of 2010, says Deutsche Bank, while Blackrock lost 1.1 percent to finish the year with a 42.8 percent share of global ETP assets. Vanguard has increased its global ETP market share by nearly four percentage points in two years, says Deutsche Bank, and now controls US$170 billion in assets.

In Europe, however, there was a more significant shift in leading providers’ market shares. BlackRock gathered 70 percent of all the region’s net new cash inflows to ETFs in 2011, apparently benefiting from a widespread switch from funds using synthetic (derivatives-based) replication to those based on physical ownership of the index securities.

As a result, BlackRock’s market share in Europe jumped sharply in 2011 after declining for several years, reaching 39.1 percent at year-end, up from 35.5 percent a year earlier. Lyxor was the main loser, seeing its share of the European ETF market drop from 18.1 percent to 13.6 percent during 2011, while Deutsche Bank saw its share decline from 17 percent to 15.4 percent.

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