Exchange traded fund assets approach $3tn

Investors have continued pumping money into exchange traded funds and products this year, propelling the global market towards $3tn of assets, highlighting a pronounced change in trading across markets.

Investors poured $96bn into ETFs and ETPs during the first quarter of 2015, more than double the $37.2bn of inflows for the same period a year ago, according to data provider ETFGI. Globally, the industry reached a record of $2.926tn by the end of March.

The explosive growth of these investment vehicles reflects their lower cost than mutual funds and flexibility as they trade on exchanges like shares, but mirror the performance of baskets of securities or asset classes.

Before the financial crisis, ETFs were less popular with investors, who favoured individual stock pickers that tried to beat the market. A pronounced reduction in market volatility in recent years as central banks have aggressively eased policy has enhanced the popularity of passive investment vehicles that track broad trends, with a fourfold rise in assets for the sector since 2007.

"With central bank intervention in Europe and the States, in the last couple of years individual stocks are increasingly moving in line with each other so beta heavy strategies, which rely more on underlying market movements, have been popular," said Simon Colvin, vice-president at Markit, the data provider. "It's the death of alpha.''

Last year investors poured $323.3bn into ETFs, and this year flows have already hit $102.6bn, according to Markit.

Retail investors, hedge funds and financial advisers are the main users of exchange products, attracted by how they facilitate broad exposure to countries, regions or asset classes that were previously out of reach to average investors.

"They're democratising investing," said Deborah Fuhr, managing partner at ETFGI. "Investors have changed from seeing them as a passing fad or the enemy, because they're passive rather than active, to a powerful tool."

The growth of the sector also reflects how they undercut the costs of buying mutual funds.

"Because bond yields are zero or negative in many pars of the world, charging fees seems tough for many investors to reconcile," said Kevin Corrigan, head of credit at Lombard Odier Investment, which recently moved into the ETF space.

But the rise of ETFs has raised concerns about illusory liquidity and heightened volatility.

Zoso Davies, strategist at Barclays, said: "One concern is the liquidity mismatch between what the ETFs purport to offer and the underlying asset. If ETFs need to buy or sell large positions in a short period of time, due to investment flows, that is likely to distort the market and increase volatility."

The launch of quantitative easing in the eurozone has fuelled a strong rally in equities and weakened the euro significantly. That has propelled large inflows into the Wisdom Tree European hedged equity fund, which tracks eurozone shares and sells the euro, allowing retail investors to gain the kind of hedged exposure that would otherwise be costly.

It has attracted $11.2bn this year, almost twice the inflow of its nearest rival, the Deutsche X-trackers MSCI EAFE hedged equity ETF, which has attracted $6.27bn, according to Markit.

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