Strong Growth to Continue Despite Volatile Markets Deutsche Bank – Synthetic Equity & Index Strategy – Global

ETF Annual Review & Outlook – Strong Growth to Continue Despite Volatile Markets
20 January 2016 (110 pages/ 2400 kb)

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Data in this report is as of 31st December 2015

ETP assets up 8.3% reaching $2.95 trillion in 2015 driven by record inflows

Global ETP industry reached near the $3 trillion mark and closed at $2.95 trillion by the end of 2015. Amid volatile markets last year, ETP assets grew by 8.3% mainly attributable to organic sources (i.e. new money inflows) which made up 13.7%, while prices went negative and eroded 5.5% from overall assets. Year-on-year, organic growth or new money inflows continued to remain strong and provided healthy growth to the ETP industry.

Similar to 2014, global ETP industry once again received healthy inflows in 2015 recording inflows of $373.8bn but this time it is the highest ever flows total for any of the years historically. Flows for US listed ETPs were similar to last year but Europe and Asia listed ETPs saw significant jump in new creations. During the  last three years equities have stood as leaders contributing the major portion of the inflows, but since 2014 fixed income ETFs also showed significant signs of growth and contributed $105.4bn in 2015 ($89.4bn in 2014).

The US, Europe, Asia-Pac, and RoW regional ETP assets closed the year at $2.11 trillion (+6.8%), $507.4bn (+10.6%), $250.2bn (+23.8%), and $74.7bn (-7.9%), respectively.

ETP assets likely to reach $3.46 trillion at the end of 2016

We project the industry will continue to grow significantly in 2016 despite potential weak markets. In our base case scenario, assuming a neutral market condition, global ETF assets may grow by 17.8%: broken down into 11.6% or $335bn growth from new flows, and 5.5% from price appreciation. This growth should put the ETF assets well on their way to $3.4 trillion by the end of 2016. We expect the US ETF market to be the major contributor with asset growth of 16.1% and inflows in the vicinity of $230bn. In a bull market case, ETF assets may grow by 29.7% reaching over $3.7 trillion. We expect ETPs (including ETFs and other exchange traded products such as ETVs/ETCs) to experience a similar growth rate and reach about $3.46 trillion in 2016 in our base case scenario, and pass $3.8 trillion in a bull market case.

ETF flows suggest that investors continue to prefer less risky assets

2015 was another strong year for global equity flows with over $250bn. Similarly, fixed income ETP flows also attracted healthy amounts of new cash reaching just above $100bn at the end of last year. However, other asset classes such as commodities with under $5bn of inflows didn’t enjoy the same degree of interest from investors.

Most of the major trends happened within equities. Among equity products, ETPs with exposure to developed markets excluding the US received the largest new allocations with inflows of $195bn last year. Meanwhile European-focused and Japan-focused equity products also received significant attention from investors with positive flows of $80bn and $50bn, respectively.

ETPs tracking US equities didn’t fall short either, and attracted $66bn in inflows during the same period. On the other hand, ETFs with focus on Chinese equities also received significant attention, but mostly due to the exodus of investors who pulled about $15bn away from these funds. Outside equities, the most remarkable trend was registered in fixed income where the investment grade space received over $70bn inflows during 2015.

Going into 2016, our house view continues to favor global equities (mainly DM), a strong USD as well as investment grade credit and short durations in Fixed Income (Europe is more preferable than the US). Therefore we expect equity products particularly in developed markets to continue attracting most of the flows. Certain type of Fixed Income products and currency hedge products should continue to remain relevant during 2016, although less than in 2015; while smart beta products should raise strong support as investors seek to control risk in a more specific way in the current year.

ETP trading activity up 16.8% in 2015 reaching $21.8 trillion and will continue to rise

Trading activity picked up in 2015 again with ETP turnover levels registering a rise of 16.8% over 2014. Overall turnover levels in 2015, 2014 and 2013 were $21.8 trillion, $18.7 trillion and $16.5 trillion, respectively. In 2015, Asian ETFs recorded the highest increase of over 100% in trading volumes ($1.9 trillion), significantly surpassing European on-exchange volumes ($903bn, up 22.9%). US ETFs continue to dominate the global ETP trading activity ($18.8 trillion, up 12.1%). We expect to see ETP trading activity to further increase in 2016 due to wider adoption of ETFs, elevated market volatility, and more product offerings.

ETF markets to continue forward on strong organic growth

In the US, the organic growth gap between ETFs and Mutual Funds, and Passive and Active Management continued to widen reaching levels of about $250bn and $500bn through the end of November 2015, respectively. In the meantime, we believe that there is still room for new entrants and new products despite the record activity registered during 2015; however we believe that smart beta ETFs and clear distribution access should be key to the success of new ETF ventures. Furthermore, we believe there is abundant room for organic growth in the range of $500bn to $1 trillion over the next 5 to 10 years just from migration away from less efficient vehicles and penetration to the retirement market.

In Europe, smart beta products expected to be in demand as market uncertainty remains and investment landscape evolves. Also, currency hedged ETFs to be utilized to invest with reduced currency risks. Despite poor start to equity markets, ETFs tracking European equities anticipated to have a reasonable year. In addition, absolute ETF trading volumes expected to increase despite concerns on overall equity volumes.

In Asia-Pac, Japan, China and South Korea were the key domestic markets which drove the industry in 2015. Most of the AUM growth and inflows of the region were contributed by Japan listed ETFs, while China listed equity ETFs saw heavy redemptions offset by money market ETFs receiving notable inflows. Trading activity also rose in the region in 2015, primarily in China, Hong Kong and Japan. South Korea saw most number of ETF launches along with many new development plans announced by its Financial Services Commission to boost ETF market in South Korea. We expect Japan (with increased equity allocation from GPIF and the ETF purchase from Bank of Japan), China (stronger asset growth as market stabilizes and increased product adoption) and South Korea (with new developments being implemented) to be major growth drivers in Asia-Pac region in 2016.