US equity ETFs shore up declining emerging markets

Laurent Kssis at LaBranche Structured Products Europe (LSPE) discusses European ETF trades for the week ending 4 February.

The iShares S&P 500 ETF saw creation orders worth $142m last week, finishing the clear winner by inflows to an individual product for the second week running. Emerging market equity funds once again suffered massive redemptions.

Global redemptions worth $7.2bn are the third largest weekly outflows ever from emerging market ETFs, coming as the impact of inflationary pressures are felt across both developed and emerging economies. Net outflows over the past two weeks add up to $10.2bn, a figure not seen since January 2008.

Meanwhile global equity indices fared significantly better, with the S&P 500 and the Eurostoxx 50 up 2.7% and 1.7% respectively. 

There are clear signs of funds moving from iShares' into Vanguard's emerging markets ETF - with the former losing $3.9bn and the latter seeing inflows of $1bn. In the US, equity redemptions were driven by record outflows from emerging markets, although ETFs tracking equities in Europe, Middle East and Asia held up relatively well, with practically flat outflows of $155m.

India's Nifty index has dropped 12% already this year, and we have seen consistent sellers in Lyxor's India S&P CNX Nifty and MSCI India ETFs. However, apparently small inflows of $12.8m into the Market Vectors Egypt Index ETF are the largest ever into that fund and equivalent to 12% of its assets under management (AUM).

ETFs investing in bonds saw a pick up in trading, with good two-way flows and net inflows of $2bn. We helped buyers in products tracking UK gilts, as well as iShares Barclays Capital Euro Corporate Bond and Euro Government Bond 3-5 ETFs, while seeing sellers in iShares eb.rexx Government Germany 2.5-5.5 and 5.5-10.5 DE ETFs.

Our primary market volumes fell back 40% from the week ending 28 January as we avoided large sell over-the-counter orders in a number of emerging markets. Because of this, our creation/redemption ratio came in 4:1 in favour of creations. Most of these creations came from active sector rotation orders, following on from the previous week's momentum. It is interesting to note though that two-thirds of our on-screen activities came in emerging market ETFs, where investors were eager enough to unload their holdings on screen at unfavourable prices, rather than receiving over-the-counter fills.

We also saw and helped buyers in Lyxor ETFs on DJ Stoxx 600 sectors, including those in banks, insurance, oil and utilities, and on the iShares Stoxx Europe 600 Utilities Swap.

Meanwhile there were decent numbers of sellers in ETFS Copper, possibly showing investors taking profit as the ETF has gained 5% since the beginning of this year and reached a record high last week.

We have noticed that borrowing on both the UK and US listings of the iShares MSCI Emerging Markets ETF has increased dramatically, largely due to China and other markets being closed last week. This week, the Tokyo Stock Exchange will be shut on Friday, which will affect the prices of corresponding ETFs.

This report is not an offer to sell or a solicitation of any investment products or other financial product or service, an official confirmation of any transaction, or an official statement of LSPE.