Exchange traded funds global assets reach $3tn

Enthusiasm for exchange traded funds has propelled the global market beyond $3tn in assets, highlighting how investors increasingly prefer tracking broad trends.

The rise of exchange traded funds and other so-called passive investing strategies has gathered pace in recent years thanks in part to central banks flooding financial markets with money and suppressing volatility. The sustained rise in asset values since 2009 has rewarded investors following a broad benchmark such as the S&P 500 or bond index, while so-called stock pickers and actively managed funds have struggled.

According to data provider Markit, the asset class has risen above $3tn for the first time, coming after investors poured $98.46bn into ETFs during the first quarter, almost triple the $37.2bn of inflows for the same period a year ago.

"It speaks volumes to the asset class and it's rapid rise. These funds have been around for a while but have only gained traction with recent macro economic developments," said Simon Colvin, vice-president of Markit.

The news comes as Pimco's Total Return Fund ceded its crown as the world's largest bond fund to Vanguard's passive Total Bond Market Index Fund, illustrating the shift in sentiment from active to passive management.

The popularity of ETFs over mutual funds has also been fuelled by their lower costs, tax advantages and the flexibility associated with the fact they trade on exchanges like shares. For cost conscious investors, Pimco's active fund charges 85 basis points, whereas Vanguard's passive fund charges just 7 bps.

"Passive funds, be it in equities or fixed income, have been the preference since the financial crisis. It's quicker to put on positions and easier to invest," said Brian Leung, investment strategist at Bank of America Merrill Lynch.

Since the financial crisis, global central banks launched a period of aggressive monetary easing after the crisis, driving volatility down and fuelling powerful rallies in bond and share markets. In turn, investors have favoured passive strategies that track broad market trends.

The best performing ETF so far this year has been the Wisdom Tree European hedged equity fund, which tracks eurozone shares and hedges out the impact of the euro, highlighting the way these funds allow investors to take very specific, complex bets that would otherwise be costly for retail investors. Some $13bn has flowed into the fund so far this year.

However, while ETFs have performed strongly under conditions of aggressive monetary easing, the asset class is yet to be tested during times of central bank tightening.

With the first Federal Reserve rate hike in almost a decade widely anticipated in the coming year, ETF investors are cautious.

"If we finally move back into a rising rate in environment, there may be an argument that an active manager, especially in fixed income, could be a better way to go," said Mr Leung.

"When rates rise there's an inherent downwards pressure on bonds and you need someone more nimble to navigate these waters," he added.

Cameron Brandt, director of research at EPFR, said: "We'll see how they do if things get a bit more volatile as the US tries to switch to tightening, Europe is up and down and China tries to rebalance."

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