Demand for Single-Sector Equity Exchange-Traded Funds on the Rise
Europe’s investors undeterred by risks attached to such products
November 2018, London. More providers are launching single-sector equity funds to meet rising demand,
despite the high-risk nature of the products and the obvious limitations of choice for stock pickers, according to
the latest issue of The Cerulli Edge―European Monthly Product Trends.
Cerulli Associates, a global research and consulting firm, notes that a total of 17 single-sector exchange-traded funds (ETFs) were launched in the first nine months of 2018 in European domiciles.“The lack of diversification creates more volatility,” says André Schnurrenberger, managing director, Europe at Cerulli. “Some investors are seeking a slightly more nuanced strategy, but may at times see single-stock selection as going too far if they believe that certain phenomena are driving whole sectors up. ETFs can be a cheap way to play this view.
The oil industry is an example of a driver for an entire sector. Oil companies will strive to cut exploration and
drilling costs as far as possible. But fluctuations that take the price of a barrel of Brent Crude to US$85 from
US$60 in a few weeks will dwarf the superior efficiency savings one company may claim to have achieved relative
to another.ETFs based on the new classification of the U.S. communications sector, which has expanded beyond telecom
companies to include giants Facebook and Google parent Alphabet, have a degree of built-in diversity. Facebook
is a different company from Google, which in turn is very different from AT&T.“However, if a sector classification is too broad, it can become meaningless,” points out Schnurrenberger.
• Europe’s ETF industry posted net inflows for the third-consecutive month in September, gathering €3.8 billion
(US$4.3 billion). This takes the year-to-date (YTD) net inflows to €26.9 billion. Cerulli notes that even though ETFs
are making a recovery, YTD net inflows are significantly down on the €66.1 billion gathered during the same
period last year.
• September was the sixth-consecutive month of net outflows for the U.K. market. YTD net outflows amounted to
£10.1 billion (US$13 billion) at the end of September. Mixed-asset funds were hardest hit, recording net outflows
of £1.6 billion, followed by money market funds (-£0.5 billion) and equity funds (-£0.4 billion).
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