BMO Global Asset Management (EMEA) PAGE 1 Continued Market volatility has regularly caused a spike in ETF volume as a percentage of exchanged traded activity and 2016 has been no exception. The surprise outcome of the Referendum on EU Membership vote (referred as Brexit hereafter), caused the largest trading event for London listed ETFs, recording their highest value trading day ever. London listed ETFs have proved popular tools for investors in positioning portfolios ahead of the vote; trading volume in June was 88% higher than the same month last year 1 . ETFs are now considered to be a market indicator in terms of investor confidence and asset flows. Market uncertainty, and continued downward revisions on global growth expectations, has dovetailed investor demand with the growing choice in factor based ETFs, as investors look for more nuanced exposures. Equity ETFs focused on income, quality, and low volatility or combinations of these factors, are capturing increased market inflows. Global events have caused scrutiny on currency exposures, where local markets returns and currency returns have been significantly decoupled. The expansion of ETFs offering currency hedged and unhedged exposure, has given investors effective tools to manage currency within their portfolios. In fixed income markets, immediately following the Brexit vote, we saw a rotation to safety, towards government bonds and longer duration. Following longer term trends, we are seeing a bias towards investment grade exposures, both globally and within local markets, also strategies that target precise maturity bands, i.e. short, medium or long-term, allowing investors to act according to their market views. The increased scrutiny on fees has played to a key feature of ETFs as low cost long term investments, investor awareness and media attention to low cost ETFs has only multiplied. BMO Global Asset Management ETF Outlook 2016 Mid-Year Update The exchange traded fund (ETF) industry has continued to capture investor interest and add record breaking inflows as investors use ETFs both as long term holdings in their portfolios and as trading tools to manage through market events. This outlook report examines the first half of the year and looks forward to anticipate key industry developments over the remainder of 2016. Global Trends 2 The global ETF market continues to grow, hitting a record high of US$3.2 trillion as of June 2016, with over US$122 billion in new assets this year. With the uncertainty surrounding the global economic landscape, ETFs prove to be effective positioning tools with more investors looking to take advantage of short term market movements through ETFs. In Europe, total assets have reached US$529 billion with inflows of just over US$22 billion year to date. Fixed income ETFs have, in this period, attracted the most assets gathering a record level of US$17.62 billion. In the low yield environment, the low fees of fixed income ETFs help investors keep more income relative to other collective funds. Market Volatility and ETFs Events around the world have continued to keep volatility at the forefront of investor’s concerns. For international investors the Brexit vote caused over a 10% fall in U.K. equities over the two trading days following the result, once currencies are factored in 3 . While markets have since rebounded, based on strong U.S. economic data, the uneven path over the course of the year has given investors a rough ride. The benefits of risk adjusted exposures have only become more appealing. Investors have used ETFs to address volatility by moving to factor based exposures that have lower risk than the broad market. Low volatility strategies, have proven to deliver returns in excess of the market over the long term, based on staying away from high risk investments, dampening market downturns, and thereby benefitting from compounding returns. Income based ETFs cushion investors from market turbulence to a degree by investing in higher dividend stocks and biasing the portfolio towards mature, industry leading companies. Quality factor ETFs can also reduce risk, relative to mainstream index tracking ETFs, by selecting industry leading companies that are positioned to withstand economic downturns, while at the same time providing growth when markets recover. The increased scrutiny on fees has played to the benefits of ETFs 1 LSE ETF & ETP Monthly Update, July 2016 2 ETFGI Global Insights, 30th June 2016. 3 Bloomberg, 30th June 2016
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BMO Global Asset Management (EMEA) PAGE 1
Continued
Market volatility has regularly caused a spike in ETF volume as a percentage of exchanged traded activity and 2016 has been no exception. The surprise outcome of the Referendum on EU Membership vote (referred as Brexit hereafter), caused the largest trading event for London listed ETFs, recording their highest value trading day ever. London listed ETFs have proved popular tools for investors in positioning portfolios ahead of the vote; trading volume in June was 88% higher than the same month last year1. ETFs are now considered to be a market indicator in terms of investor confidence and asset flows.
Market uncertainty, and continued downward revisions on global growth expectations, has dovetailed investor demand with the growing choice in factor based ETFs, as investors look for more nuanced exposures. Equity ETFs focused on income, quality, and low volatility or combinations of these factors, are capturing increased market inflows.
Global events have caused scrutiny on currency exposures, where local markets returns and currency returns have been significantly decoupled. The expansion of ETFs offering currency hedged and unhedged exposure, has given investors effective tools to manage currency within their portfolios.
In fixed income markets, immediately following the Brexit vote, we saw a rotation to safety, towards government bonds and longer duration. Following longer term trends, we are seeing a bias towards investment grade exposures, both globally and within local markets, also strategies that target precise maturity bands, i.e. short, medium or long-term, allowing investors to act according to their market views.
The increased scrutiny on fees has played to a key feature of ETFs as low cost long term investments, investor awareness and media attention to low cost ETFs has only multiplied.
BMO Global Asset Management ETF Outlook 2016Mid-Year Update
The exchange traded fund (ETF) industry has continued to capture investor interest and add record breaking inflows as investors use ETFs both as long term holdings in their portfolios and as trading tools to manage through market events.
This outlook report examines the first half of the year and looks forward to anticipate key industry developments over the remainder of 2016.
Global Trends2
The global ETF market continues to grow, hitting a record high of US$3.2 trillion as of June 2016, with over US$122 billion in new assets this year. With the uncertainty surrounding the global economic landscape, ETFs prove to be effective positioning tools with more investors looking to take advantage of short term market movements through ETFs.
In Europe, total assets have reached US$529 billion with inflows of just over US$22 billion year to date. Fixed income ETFs have, in this period, attracted the most assets gathering a record level of US$17.62 billion. In the low yield environment, the low fees of fixed income ETFs help investors keep more income relative to other collective funds.
Market Volatility and ETFs
Events around the world have continued to keep volatility at the forefront of investor’s concerns. For international investors the Brexit vote caused over a 10% fall in U.K. equities over the two trading days following the result, once currencies are factored in3. While markets have since rebounded, based on strong U.S. economic data, the uneven path over the course of the year has given investors a rough ride. The benefits of risk adjusted exposures have only become more appealing.
Investors have used ETFs to address volatility by moving to factor based exposures that have lower risk than the broad market. Low volatility strategies, have proven to deliver returns in excess of the market over the long term, based on staying away from high risk investments, dampening market downturns, and thereby benefitting from compounding returns. Income based ETFs cushion investors from market turbulence to a degree by investing in higher dividend stocks and biasing the portfolio towards mature, industry leading companies. Quality factor ETFs can also reduce risk, relative to mainstream index tracking ETFs, by selecting industry leading companies that are positioned to withstand economic downturns, while at the same time providing growth when markets recover.
The increased scrutiny on fees has played to the benefits of ETFs
1 LSE ETF & ETP Monthly Update, July 20162 ETFGI Global Insights, 30th June 2016.3 Bloomberg, 30th June 2016
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Capturing Yield
Income oriented investors continue to have a difficult time generating enough yield from traditional sources, interest rates have been far lower for longer than most investors expected. As of June 30th, German and Japanese 10 year bonds offered negative yields, with UK and U.S. equivalents at 0.8% and 1.47% respectively4. Investors are selecting ETFs that offer higher yielding fixed income segments, increased equity dividends from income and quality factor portfolios, and specialty ETFs to support their income requirements. The efficiency of trading in liquid, diversified ETFs makes accessing these strategies easier than ever before.
Fixed Income
Like equities, market volatility has led to increased activity on fixed income ETFs. Post Brexit, we saw immediate inflows into full term and long-term government bonds. Interest rate curve and credit positioning has become more important in portfolio construction as investors look for yield and solutions to position around market events. The ETF industry, while traditionally offering broad exposure bond ETFs, has added more precise exposures, slicing the credit spectrum and segmenting by maturity to create short-term, mid-term, and long-term exposures.
Fixed income ETFs have been developed to meet market demand for both global fixed income and country specific portfolios. We expect the growth of fixed income ETFs to outpace equity ETFs, as investors have growing difficulty sourcing and trading bonds. While the liquidity of the ETFs is tied to the underlying asset class, exchange trading between buyers and sellers on mature ETFs adds on an effective layer of liquidity.
Impact of Currency
2016 has seen higher currency volatility, and multiple reverses of currency momentum. Brexit has weakened the Sterling by over ten percent, and the U.S. Dollar strengthened against most currencies. Investors have needed to be nimble, both from a strategic and a shorter term tactical perspective when considering currency exposure.
With both hedged and unhedged ETFs available, investors can easily switch currency exposures, while maintaining or shifting underlying portfolio exposures. Following Brexit, we saw the most immediate trading occur in favour of hedged international ETFs.
The Opportunities Ahead
The number of global ETF providers continued to expand over the past 18 months, from 239 to 284, the number of ETFs has risen by 15% globally5. The increase in both providers and number of ETFs has seen continued innovation, to create products that stand out in the marketplace, investors benefit from having more choice, to target portfolio risk exposures, to precisely position fixed income, and build diversified, efficient portfolios.
In Europe, we anticipate asset growth to accelerate as evolving regulation lower barriers across individual markets. The shift towards fee-based advice as well as increased investor protection and transparency through MIFID II will have a positive impact on ETF adoption across investor groups. We expect that ETFs will grow as a percentage of total exchange traded volume, as they successfully help investors navigate through events.
BMO ETFs
In Europe BMO has launched its first range of ETFs with a firm income generation focus. The equity suite of Income Leaders ETFs aims at delivering sustainable income, filtering companies for quality and dividend yield, thus reducing portfolio volatility. In the fixed income space, the global credit instruments aim at capturing yield in different maturity bands to enable precise portfolio positioning opportunities. Hedged instruments introduce additional protection from currency swings.
To access BMO’s range of ETFs in Europe click here.
For further information on BMO ETFs please visit www.bmogam.com/etfs
4 Bloomberg, 30th June 2016.5 ETFGI Global Insights, 30th June 2016.
ETFs will grow as a percentage of total exchange traded volume, as they successfully help investors navigate through events.
F&C Management Limited is the investment manager of BMO UCITS ETF ICAV which is authorised by the Central Bank of Ireland as a UCITS.
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