Global ETF Review Q3 2019: Bursting Burry's bubble | BetaShares

Global ETF Review Q3 2019: Bursting Burry’s bubble

BY Ilan Israelstam | 20 November 2019
global etf review Q3 2019: etf flow

Reading time: 3 min

The global ETF industry ended the third quarter of 2019 at a record high, with US$5.8T1 in assets under management – reflecting growth of 20% YTD.

According to BetaShares’ Global ETF Review Q3 2019, another significant milestone was passed during the quarter, with assets in U.S. passive managed funds and index ETFs topping those in U.S. active managed funds for the first time.

The BetaShares Global ETF Review looks at key trends and developments in the ETF industry outside Australia, and accompanies the monthly BetaShares Australian ETF Review, which focuses on the local ETF industry.

Investors sought out commodities and fixed income

Continuing the trend from previous quarters, the fixed income asset class received the highest inflows with 48% of total inflows which, although solid, was significantly less than the 61% of flows that were received last quarter. Equity ETFs maintained ~38% share of inflows, consistent with the previous quarter. The largest change in terms of investor preference was in commodities, whose share of inflows rose from just 0.3% of total inflows in Q2 to ~10% of inflows in Q3. In this category, most of the demand was for gold and silver, with investors seeking out safe havens due to increased geopolitical risk.

U.S. ETF flows by asset class: Q3 2019

Equity Fund Flows by Asset Class ($U.S. m) 2019-Q3 % 2019-Q2 %
Fixed income $37,818 48.4% $39,388 61.2%
Equity $29,488 37.8% $24,371 37.8%
Other $638 1.0%

BetaShares CEO, Alex Vynokur, said: “Defensive exposures are continuing to attract investor funds, reflecting concerns about the US-China trade conflict, and caution around equity market valuations. The marked change from last quarter, however, was the more diversified approach taken, with investors allocating significant funds to precious metals alongside fixed income.”

The global trends were mirrored locally, with fixed income being the highest category for inflows over the year to date, receiving ~$A2.5B of net flow in the year to September 2019. Additionally, Australian Gold ETFs have been popular, with approximately $300m of net flows over this period.

Positive trend towards ETFs continues

ETFs captured 75% of flows in the US investment management industry in the quarter. Passive ETFs were particularly strong, taking in ~US$73B.

As a result of this continued preference by investors, assets in U.S. passive managed funds and index ETFs topped those in U.S. actively managed funds for the first time in August.

Mr. Vynokur said: “What is particularly striking in the data is the continued investor preference towards ETFs, both active and passive, with ETFs outselling mutual funds 3 to 1 in the September quarter.”

U.S. Flows by Structure – Q3 2019 (U.S. $m)

Source: Bloomberg

Spotlight: ETFs and market ‘bubbles’

In a recent interview with Bloomberg, hedge fund manager Michael Burry, of The Big Short fame, argued that inflows into index funds including ETFs are distorting prices for stocks and bonds, just like CDO purchases did for subprime mortgages more than a decade ago.

In perhaps the most clear illustration of the fallacy of such an argument, the BetaShares’ Review pointed to the independent relationship between ETF flows and market pricing, as demonstrated by a comparison of US ETF flows with returns from the S&P 500.

S&P 500 Index Returns vs U.S. ETF flows (U.S. $m)

Source: Bloomberg

Mr. Vynokur said: “The idea that the growth of ETFs is causing market distortions or bubbles is not a new one, and so, in our quarterly spotlight we decided to use data to rather quickly refute this myth. We also provided evidence that despite the rapid growth in the ETF industry, ETFs still own a relatively small market share of underlying securities. As such there really is no evidence to support the price distortion argument, currently being espoused by a number of theorists.”

A copy of the BetaShares Quarterly Global ETF Review Q3 2019 can be found here.

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