European exchange-traded funds rode a broad rally in risk assets to chalk up record demand in January, with high-dividend funds the most sought after, a senior ETF strategist at State Street Global Advisors said. Matthew Arnold said the company's European products saw a net inflow of about $180 million in January, against a monthly average of about $42 million in 2011, and the positive trend was likely to continue throughout this year.
The record demand came as stocks and the euro rallied, driven by a flood of cheap three-year European Central Bank loans to banks in December, as well as a fresh US commitment to its easy monetary policy. "The 'risk on' sentiment has shown up in ETF flows, with equity, commodity and higher risk fixed income categories experiencing significant inflows," Arnold said.
ETFs covering European equities, high dividend equities and emerging market local currency bonds had experienced the highest inflows, he added. High dividend-paying equities and higher-yielding fixed income categories were particularly attractive at a time of low interest rates across the developed world, he said.
"Investors that are concerned about the prospects for economic growth should also favour companies that have shown an ability to grow their dividends consistently over time. We have certainly seen strong demand for our dividend ETFs, both in the US d Europe." Most ETFs are backed by a basket of the shares, commodities or bonds they track and are traded like stocks. Equity ETFs are often "passively managed", tracking an index, although bespoke "actively managed" funds do exist, tracking a basket of selected stocks.
State Street's ETF assets of $294 billion account for about 20 percent of the funds invested in ETFs worldwide. European equity ETF assets total $300 billion, while the US market is worth $1.1 trillion. About 60 percent of European ETF assets are in equity products.
"People are buying ETFs for a range of reasons. ETFs are typically about a third cheaper than actively managed mutual funds, one unit of an ETF gives exposure to hundreds of securities and people can buy as little as one share," Arnold said. They also allowed access to assets that were often difficult for retail investors to reach, such as emerging market local currency bonds, European high-yield debt and emerging market small-cap stocks. "As more investors are made aware of the benefits of investing via ETFs, we expect demand to continue to grow in 2012. We have also seen a rise in pension funds using ETFs as they recognise the benefits of the structure and the ease of use," he said.
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