Financial Mail - Investors Monthly
The rise and rise of ETFs
Passive investment instruments were made for these times, writes Pedro van Gaalen
“ETFs help diversify investment portfolios and offer efficient access to markets across the globe
The Covid-19 pandemic unleashed extreme volatility across markets in the first half of 2020.
“The uncertainty during March prompted a flood of investment flows out of equity markets as institutional investors moved into safe haven assets …Speculators also bought into and sold out of strategic positions, which increased trading volumes,” says Adèle Hattingh, business development and exchange traded products (ETPs) manager at the JSE.
Amid this market volatility, more institutional investors turned to exchange traded funds (ETFs) because these passive investment instruments were made for these times, says Brett Olson, head of BlackRock’s iShares fixed income ETFs in Europe, the Middle East and Africa.
“European ETF trading volumes surged during the recent market volatility, reaching $120bn per week at one point. This volume was not only a record but was almost three times more than the 2019 weekly average.”
A similar trend emerged in SA, says Hattingh. “Before the pandemic, the JSE traded R200m a day on average via ETFs. In 2020 that figure nearly tripled to just less than R600m per day, with close to R1bn per day in value traded in March.”
Olson attributes this worldwide trend to multiple factors. “ETFs help diversify investment portfolios and lower risk. They also offer efficient access to different markets across the globe, ranging from indices like the FTSE 100 to specific countries and various asset classes, including government bonds and commodities like gold.”
Fixed income ETFs, in particular, captured the attention of some of the world’s largest investors, according to BlackRock’s July 2020 “Turning Point” report.
The report states that market volatility and the performance of fixed income ETFs in 2020 accelerated institutional adoption and shifted these investments from the margin — where they were used for tactical allocations or offered temporary exposure to a hard-toaccess asset class — to critical components in portfolios.
The largest and most heavily traded fixed income ETFs also provided more liquidity, greater transparency and lower transaction costs than the underlying bond market, says the report, helping investors navigate extreme price dislocations and sidestep a legacy marketplace that remains fragmented and comparatively difficult to access, even for institutional investors.
This inherent efficiency in ETFs simply added to their appeal during a period when fund managers and investors had to act quickly in response to dynamic market conditions.
“ETFs provide flexibility because they are traded on exchanges … This makes them simple to buy or sell when markets are open, which has been especially helpful to investors navigating recent volatile markets because it allows them to trade when they need to most,” says Olson.
The resultant ramp-up in adoption by retail and institutional investors has helped to accelerate growth in passive investments globally and in SA.
Globally, BlackRock counted more than 60 asset owners and asset managers who were first-time buyers of its iShares fixed income ETFs in the first half of 2020, collectively adding roughly $10bn in assets under management (AUM).
And data released by ETFGI shows that assets invested in ETFs and ETPs listed globally surpassed $7-trillion at the end of August 2020. “The ETP industry was only expected to reach that milestone in 2021,” says Hattingh.
Similarly, the JSE saw its ETF market cap surpass R100bn in AUM for the first time since launching ETFs 20 years ago. “That equates to 20% compound annual growth, which is on par with the global average, from 78 ETFs listed on the exchange. This represents significant growth given SA’s predominantly active focus, our relatively small market and an ETF sector that is still in its infancy,” says Hattingh.
She expects that this growth trend will continue beyond the pandemic as the global economy recovers.
“The JSE passed the March market stress test with zero market downtime. Sellers got their cash and buyers got into their positions despite the massive volumes, which is testament to the well-ordered and regulated local market.”
The stress test also allayed fears regarding potential systemic risks posed by overconcentration in passive investments. The resultant trust this performance has created among investors will likely entrench the role that ETFs play in portfolio construction in the future. ●