European ETF market review: August

15 September 2020 | Markets and Economy

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August 2020

 

Commentary by Sophie Hunter, ETF Capital Markets specialist, and Nusrath Hussain, senior ETF product specialist.

Highlights

  • Flows in European domiciled ETFs slowed in August but nevertheless remained positive with net inflows of $8.6bn1.
  • Net inflows for equity ETFs were again slightly ahead of those for fixed income.
  • ETF bid-offer spreads continued to tighten as markets resettled into more normal patterns of activity.

Month at a glance

The traditional August holiday lull saw activity in European-domiciled ETFs slow compared with July. Nevertheless, the sector enjoyed a fifth consecutive month of net inflows; $8.6bn. In a continuation of last month, net inflows for equity ETFs were again slightly higher than those for fixed income at $4.4bn and $3.6bn respectively. This followed further economic stimulus in France and Germany, a recovery in June retail sales in the euro area to pre-Covid-19 crisis levels and the announcement of more flexibility in the targeting of US inflation, which had the effect of boosting riskier assets. On a year-to-date basis, however, net inflows into fixed income ETFs remained significantly ahead of equities; $27.1bn compared with $9.6bn for equities1.

Within equities, ETFs investing in global equities saw by far the biggest net inflow at $2.4bn. Conversely, ETFs invested in eurozone equities saw the largest net outflow of -$0.3bn. This reflects activity in the equity markets, where the gains in eurozone stocks have lagged those for US and global equities. In part this may be due to the more fragmented nature of the European market versus the US and in part concerns over Brexit and global trade tensions.

Net inflows into fixed income ETFs were more evenly spread, with ETFs investing in Chinese bonds seeing inflows of $0.66bn, euro government bonds $0.54bn and US corporates $0.53bn. ETFs invested in European high-yield bonds saw the largest outflow of $0.08bn1.

Net inflows into commodity ETFs more than doubled from last month, from $0.24bn in July to $0.5bn as the price of crude oil rose on the expectation that more industries and economies would reopen. ETFs investing in a mixed allocation of equities and fixed-income assets also saw a significant pick-up in net inflows, from $3mn to $0.2bn. Money market ETFs continued to see net outflows1.

Monthly and year-to-date European ETF flows ($ millions)

Equity ETF inflows continue to lead in August

Source: Bloomberg. Net cash flows ($ millions) for European-domiciled ETFs, month ended 31 August 2020.

Source: Bloomberg, month ended 31 August 2020.

Spreads

ETF spreads continued to tighten in August. Across Vanguard’s UCITS ETF line-up, spreads narrowed by 8% (median month-on-month) from July levels1.

Secondary market trading volumes

Trading volumes on the secondary market decreased again on a monthly comparison, partly reflecting more settled global investment markets and partly the regular seasonal slowdown. The on-exchange average daily volume for August was $110m across the Vanguard UCITS ETF range1.

ETF trading best practices

There are a number of ways that investors can attempt to optimise their ETF trading strategy in order to minimise transaction costs. For example, limit orders allow an investor to buy/sell an ETF at no more/no less than specified price; this can help to provide some protection against unexpected spread widening, although it could also prevent an order from being executed in full.

Top 5 Vanguard European-domiciled ETFs by net cash flow in $millions  (for August 2020)

Source: Vanguard, month ended 31 August 2020.

 

Source: Bloomberg, month ended 31 August 2020.

 

 


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