The serues in the fight between Passive Investing and active is continued Updated: Jul 14, 2017 by Rupert

US equities continued to reign as the most attractive investment market for investors during the first half of 2017. According to TrackInsight, the independent ETF selection platform, US equities saw the biggest inflows of all of the markets during the first half with flows amounting to $88 billion.

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However, while the US was the most attractive market for investors US equities returned a fairly lackluster -0.42% during the period. Investors would have done better to look to Mexico where Mexican stocks ETFs returned 13.8% during the first half of the year. Unfortunately, it seems that rather than trying to capitalize on these gains, investors had better uses for their money and withdrew a €742 million from Mexican stock ETFs.

Active Funds Passive Funds

European equities were by far the best performers during the first half of the year with France are leading the charge attracting €961 million of flows to ETFs linked to French stocks. Greek stock ETFs returned an average of 17.17% and Spanish stock ETFs attracted €743 million in inflows, 42% of January assets. As a whole, Eurozone stock ETFs attracted €12.6 billion representing a 24% increase on January numbers.

Moving away from equities, bonds continue to remain popular with investors during the first half according to TrackInsight. Despite concerns about the use of ETF’s to invest in fixed income products, investors still devoted $62 billion to developed market bond ETF’s during the first half. TrackInsight monitors 569 ETFs which track 581 bond indices. The US high yield bond market was one of the few bond sectors to see outflows during period. 38 ETF’s tracking the 33 indices reported outflows of €1.4 billion, 3% of assets under management. US investment grade bonds attracted 16% of assets under management or around €46 billion. The high yield bond classes a whole, in all regions (86 ETFs tracking 81 indices) saw inflows of just under €10 billion or 12% of assets.

These enormous ETF flows that investors are still interested in equities around the world, and despite weak flows into active mutual funds, investors want a broad exposure to equities.

Passive Investing ETFs Account For 6% Of Market But Active Managers Still Rule

Since 2007, $3.1 trillion has flowed into passive bond and stock funds, while $1.3 trillion has flowed out of actively managed bond and stock funds, according to a Bank of America Merrill Lynch.

However, while these flows show that investors are trying to make the most of the opportunity offered by ETFs, according to Goldman Sachs these flows are having a worrying impact on the market. Specifically, according to the investment bank, ETFs owned nearly 6% of the US stock market at the end of the first quarter, their greatest share of the market on record. Goldman estimates that ETFs will buy an estimated $390 billion worth of US stocks this year after acquisitions totaling $98 billion in the first quarter. Still, even though ETFs have been gobbling up stocks in recent years, they remain a relatively small part of the market.

At the end of the first quarter mutual funds owned 24% of the US equity market and pension funds owned 13%. International investors owned 15% and hedge funds/other owned 6%. The balance is owned by individual mom and pop investors. The biggest buyer of US equities by far in the first quarter was companies themselves. Buybacks amounted to $136 billion of 46.6% according to Goldman.


Passive Investing Updated Jun 13, 2017 @ 10:11 Rupert Hargreaves 

Despite the increasing number of Wall Street analysts and respected investors warning about the risks of using ETFs and similar products, investors’ are continuing to flock to the asset class according to the latest annual ETF study conducted by the  EDHEC-Risk Institute.

The EDHEC-Rick Institute publishes a study every year on the use of ETFs and Smart Beta strategies among investors. Now in its tenth year, the study provides a useful insight into the world of exchange traded funds and investors’ love of the instruments.

ETF Growth Explodes, Further Gains For Passive Ahead

ETF use has exploded during the ten years the study has been going. In 2016, 45% of the respondents declared that they had used the products to invest in equities and 10% reported that they used ETFs to invest in fixed income. At the end of 2016, these numbers had risen to 91% and 65% respectively. About two-thirds of respondents (67%) used ETFs to invest in smart beta in 2016, a considerable increase compared to 49% in 2014.

Even though the use of ETFs has ballooned, the reasons why investors’ turn to these products has not changed. The single largest reason why investors use ETFs remains “to gain a broad market exposure” something only ETFs or index funds can offer for the small to medium sized investor. Costs and quality of replication are the two criteria dominating investor preoccupations, related to the main motivations for using ETFs.

Interestingly, even though investors are flocking to smart beta ETFs, respondents favor passive funds replicating smart beta indices (64%) but also use active solutions, albeit to a lesser extent (44%).

Replication of smart beta strategies are chosen for the following reasons:

“Costs, transparency of methodology and availability of information, which represent the main reasons why passive strategies are normally selected. Discretionary strategies are preferred for the reactivity and dynamism they allow, with 68% of respondents indicating the ease to change portfolio allocation as the principal advantage.”

And it seems investors’ are only planning to increase their allocations to ETFs in the years ahead further. Despite the explosion in assets under management within ETFs over the past decade, 63% of the respondents to the EDHEC study noted that they plan to increase their use of ETFs (94% for smart beta) in the future despite the maturity of this market and the current adoption rates, up from 55% in 2014 and 57% in 2015. Why do investors believe this is the best course of action? Well, apart from the reasons already mentioned above, the study shows that investors’ leading desire is to lower costs by buying ETFs. 87% of respondents indicated that this was their primary goal.

It looks as if the ETF bubble still has some way to go before investors being to pair back their exposure to the asset class.

Passive Investing and the role of active managers updated By Mark Melin May 26 8:00 PM

In the battle between active and passive investing, passive has been the overwhelming winner as of late, with projections it will overtake active in the US by 2024. But that still doesn’t mean active is dead. In fact, active management still continues to dwarf passive funds in assets under management, a Societe Generale report noted. The dichotomy of the situation, however, might be that it is active managers that are, in part, responsible for the dramatic rise in passive products.

active managers
active managers struggle in the flows war

Active managers using passive ETFs in their strategies, boosting passive assets under management

While Exchange Traded Funds are often viewed as passive investment vehicles, that isn’t entirely the case. Only half of ETFs are actually passive, observed May 24 Societe Generale Global Asset Allocation report noted.

Passive includes quant- or model-driven funds, pointing to an active decision process even if it isn’t a human making those decisions.  “As their decision process tends to be fully automated with no active human involvement being required, these funds will typically be classified as passive, even if they pursue index-enhancing or smart-beta strategies (low volatility, minimum variance, multi-factor, etc.).”

From Societe Generale’s standpoint, “what matters is the systematic approach,” which is how the benchmark is derived.

Perhaps complicating matters further is the use of passive ETF funds by active managers.

The repot observed that while almost all active funds are classified as non-ETFs, active managers, including multi-asset allocation funds using and factor-based investors, are using passive ETFs in their active strategies.

“As a consequence, the strong rise in passive funds is due not just to ETFs, and could be partly related to new approaches of active management.”

Active managers – assets under management have doubled in seven years and still dwarf passive ETFs

Much of the attention in the active versus passive debate has focused on the later trouncing the former. But in the past seven years, actively managed funds have doubled assets under management and now represent $14.4 trillion. During this period, passive funds have tripled but still manage less than half the amount of assets, with $6.9 trillion under management.


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