ETF Trends for 2013

Global exchange traded product (ETP) flows enjoyed a record setting pace through the end of November in the face of  investor trepidation over the impending US fiscal cliff and continued strains in the eurozone. Total assets have risen 23 percent from 2011 to $1.9 trillion, with flows maintaining positive momentum throughout changing market conditions.

What does this mean for flows in 2013? Here are four trends we’re forecasting for the New Year:

1.)   Continued strong interest in fixed income ETFs: After the Fed’s latest meeting, it’s clear that interest rates could remain low for the foreseeable future. But persistently low rates have not dampened fixed income ETP flows. They reached an all-time high of $68 billion through the end of November, which was 13% higher than the annual record set in 2009. Bond ETPs account for 31% of all year-to-date industry flows, up from 12% in 2008. With financial sponsors introducing new ETFs and investors seeking a means to express investment views in the bond side of their portfolio the same way they do on the equity side, we expect strong interest in bond ETPs to continue into 2013. [Year of the Bond ETF]

2.)   Expanded use of volatility-related ETPs: In the past year, investors used ETPs to opportunistically capitalize on market volatility and to help protect their portfolios against higher expected volatility. Minimum volatility funds were one of the more popular strategy-based categories in 2012 with $4.4 billion of inflows through the end of November. These exposures seek to provide equity returns with less volatility than market capitalization-weighted benchmarks.  We also saw investors add $5.4 billion into volatility ETPs that seek to deliver returns correlated to volatility indices. While 2012 may have felt like a volatile year to many investors, the VIX index actually hit a 3-year low1 in September. For 2013, we expect investors will continue to look for ways to manage volatility as uncertainty persists surrounding the fate of the eurozone and US economic recovery.

3.)   Increased demand for emerging markets (EM) debt ETPs: In 2012, demand for this class of ETPs doubled to $20 billion. The category now accounts for 6% of the fixed income ETP universe, up from less than 2% going into 2010. There are now 59 EM bond ETPs offered globally, providing increased choice for investors seeking access to segments like EM corporate and EM high yield bonds. As investors look to diversify their holdings, we expect strong demand will continue for this class of ETPs.

4.) Double-digit asset growth: The ETP industry is far from mature in any region or any asset class, and product innovation continues at a torrid pace. We believe double-digit asset growth will continue in the industry in 2013. We expect that increased strategic adoption of ETPs by investors as part of the core of their portfolios and the development of new markets and client segments will drive growth across all regions. 

Dodd Kittsley, CFA, is the Head of Global ETP Market Trends Research for BlackRock.