ETFs continued to take in money in February, but some market commentators are becoming concerned about the strong support for risk assets and are predicting an imminent correction.
Over the month, European-listed equity ETFs took in €6.1bn, according to Thomson Reuters Lipper, marking their fifth consecutive month of having the strongest inflows in the European ETF industry.
Flows were seen into both developed and emerging market equity ETFs, Lyxor reports, despite expectations of a US interest rate hike in March (which took place on 15 March, when the Federal Reserve raised rates by a further 25bps to 0.75%-1%).
Fixed income ETF inflows also reached a seven-month record high of €3.2bn, according to Lyxor, with the bulk of this going into the riskier parts of the market, namely emerging market debt and high yield.
As a whole, the global ETF industry took in some $131bn in the first two months of 2017, reaching a new all-time high, after a record-breaking 2016 when the industry saw $390bn of inflows.
But cracks are starting to show as investor bullishness seems to falter amid worries about US President Donald Trump’s ability to implement the policies he has promised.
Last Wednesday, the S&P 500 suffered its worst trading day since Trump’s election on 9 November 2016, falling 1.2% as investors hit the sell buttons, while the Dow Jones fell 238 points to 20,668 on the same day.
The US market was followed by other stock markets across the world, with benchmark indices in Japan, Hong Kong and Australia falling at least 1.4% and European stocks also losing momentum.
Markets have continued to fall this week amid worries about the imminent triggering of Article 50 which will officially begin the Brexit negotiations between the EU and the UK (on Wednesday 29 March), and continued concerns about President Trump’s ability to implement his promises policies as he failed to pass his healthcare bill in Congress on Friday.
The question now is whether this is a meaningful correction of overvalued markets, or a short-term blip in the rally.
TrackInsight’s data for Monday suggests some investors are starting to turn to bonds to mitigate the risks, with reports of strong inflows into Swiss bonds on the day of €53m, and continued inflows into government bonds of all maturities of more than €1bn.
Meanwhile, the increased use of ETFs by investors could suggest they want to be able to move in and out of markets quickly as uncertainty and volatility take hold.