Replication debate takes its toll on ETF flows

ETF cash flows showed a divergence of sentiment between the US and Europe in October, with the replication debate taking its toll on Europe, Deutsche Bank reports.

While the US ETF industry ended the month up 6.3% year-to-date, to finish with assets of $945.6bn, the European industry has grown just 0.3% so far this year. It ended the month at €211.2bn.

"The flows over the past couple of quarters have been slower than what they were the same two quarters last year. All the talk about ETFs has impacted the industry - that much I can say," says Christos Costandinides, European head of ETF research and strategy at Deutsche Bank.

"This debate had been going on for a long time in the ETF industry and with the regulators getting involved it has reached a new level. Now we are in October, we have had six to seven months of public, intense debate which has started to impact the industry."

October was the second consecutive month when the European industry has experienced close to flat flows, having slowed significantly in the fourth quarter.

This is not just due to the physical versus synthetic debate; the situation in the Eurozone has left investors unsure about where to turn.

"If you look within the asset classes there isn't that much movement - people are sitting and waiting... When there is uncertainty a lot of the time people will sell and go into safer asset classes, that doesn't seem to be happening," explains Costandinides.

"There is market volatility but at the same time people are wondering whether moving money into gold or sovereigns is a good idea so they are mostly sitting and waiting."

European equity ETFs had outflows of €469mn in October, which is less than September's outflows of €978mn but they have failed to break out of the negative trend. Of the €14.9bn which has gone into European equity ETFs this year, €11.2bn has flowed into Dax ETFs.

European commodity ETPs had a better month in October, reaching €45.3bn, a gain of 17.1% this year. Fixed income flows dropped from €554mn in September to €232mn in October.

The US figures for last month tell a very different story to that in Europe; the market had strong inflows of $24.2bn in October, according to Deutsche.

This was driven by equity ETFs, with $20.4bn of inflows, signalling a shift in investor sentiment from the previous month, when the majority of US flows went into fixed income ETFs.

Global ETF assets were at $1.3trn at the end of the month, an increase of 6.3% YTD but a drop from the end of the first half when assets were at $1.44trn, according to figures from BlackRock.

Costandinides predicts a slow end to the year in the ETF market: "We are roughly three weeks from Thanksgiving, which is when things start winding down for the end of the year.

"It hasn't been a bad year for the industry but we are having a slower end to the year than we did last year."