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Passives Watch: What drove demand in 2017?

A review of the favoured passive investing styles, sectors and geographies of the past year

Investor appetite for equity exchange traded products rapidly increased in 2017. The wider spectrum of product availability across style, sector and geography gave rise to distinct trends.

Among the style factors, momentum investing was the most favoured. It displayed the highest turnover and volatility relative to other style factors.

The momentum phenomenon can be justified by common behavioural biases among investors, as global stockmarkets continued to break new highs.

The bull herd mentality led investors to pile into winning stocks that are rising and sell out of declining stocks, regardless of underlying fundamentals.

Investors also turned to ETPs following minimum volatility strategies that enable investors to take specific exposure to equity segments with lower targeted risk than traditional market cap weighted indices.

Sectors

Technology-focused ETPs had the lion’s share among global equity flows across all sectors. Interestingly, within the technology sector, robotics and automation ETP flows outpaced those of cybersecurity ETP flows.

The global industrial and financial sectors, pinned as the strongest beneficiaries of US President Donald Trump’s policies, continued to receive the highest inflows in 2017.

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Meanwhile, consumer discretionary, consumer staples, real estate and healthcare sectors fell out of favour with investors.

Flows into value-oriented equity ETPs, dominated by the energy and financials sector, surpassed flows into growth-linked equity ETPs during the first half of the year. However, the strong price appreciation of technology stocks during the latter half of the year enabled growth-oriented equity ETPs to retrace most of those gains. That said, at present, flows into value-oriented equity ETPs have overtaken their growth counterpart by a small margin of 2 per cent.

Geographies 

Across geographies, ETPs tracking US and European equities garnered strong inflows. However, the decelerating trend indicates these markets are due for a correction. Strong inflows into geopolitical hotspots such as Italy, South Korea and Greece highlight that investors ignored risks of political events escalating despite high odds.

Flows into broad emerging market equity ETPs accelerated, up 124 per cent year on year to $213bn.

India received the largest inflows among emerging markets while China suffered the largest outflows.

The strong positive directionality – with correlation of 0.6 – of emerging market ETP flows and price, have made ETP flows a strong sentiment indicator of future prices.

Aneeka Gupta is equity and commodities strategist at ETF Securities

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