ETF watch: the biggest buy trends from the last quarter

Exchange traded funds (ETFs) have not traditionally brought much glamour to the investment space, but this a trend moving rapidly into reverse. If index trackers have quietly made investors much richer in recent years, the proliferation of thematic ETFs has now captured the everyday investor’s imagination.

ETFs arguably now cater both for those who want a core portfolio holding, such as an S&P 500 tracker, and investors who seek exposure to specific themes, sectors and investment styles. Even stockpicking is now entering the ETF space, with active products emerging in the US and expected by some to one day make an impact in Europe.

All of this means that ETF trends warrant greater attention, regardless of whether you want to buy one yourself or stay on top of market activity. The huge volumes of money moving into the likes of sector and thematic ETFs may signal that an area has great promise, or alert you to the possibility of a bubble inflating. Equally, the development of new ETFs may well point you toward emerging investment trends.

With this in mind, we plan to look at the most notable ETF trends each quarter. Using Morningstar data and analysis, we will point to some of the most interesting developments and what they mean for investors – from big buying and selling activity to the emergence of interesting new products. The Morningstar data cited refers to the European market rather than just what happens in the UK, giving a slightly broader take on things. It also captures the behaviour of both institutional and private investors.

Fund launches

A record number of thematic ETFs launched last year and niche products have continued to emerge in the first quarter of 2021. As Morningstar noted on the publication of its quarterly data, two notable new offerings are VanEck Vectors Hydrogen Economy UCITS ETF (HDGB) and L&G Hydrogen Economy UCITS ETF (HTWG). Each fund has a relatively small number of holdings so far, with 24 stocks in the VanEck fund at the end of March and 28 in the L&G ETF as of mid-April. While they share some names in their top 10 holdings (see table), the VanEck portfolio is much more concentrated. It had 82.2 per cent of its assets in its top 10 holdings at the end of March, compared with 43 per cent for the L&G fund.

Other ETF launches also reflect popular investment themes. Global Online Retail UCITS ETF (PBUY) launched in March with a focus on the e-commerce space. The index it tracks is weighted by revenue, with a maximum weighting of 20 per cent to emerging markets. Its top five positions at the end of March were Etsy (US:ETSY), Doordash (US:DASH), Peleton Interactive (US:PTON), HelloFresh (DE:HFG) and Shopify (US:SHOP). The fund has around two-thirds of its assets in North America, with roughly a fifth in Europe.

Environmental, social, and governance (ESG) launches continue to flood the market, both in the equity and bond space. On a related note, one of the most successful thematic funds of recent times, iShares Global Clean Energy UCITS ETF (INRG), has a new rival in the European market. Invesco Global Clean Energy UCITS ETF (GCLX) is a version of an existing US fund which listed in London last month.

The iShares fund has been hugely successful, pulling in billions and delivering a return of 140 per cent last year. Yet the fund has run into some issues as a result. Because the index it tracks included around 30 stocks, the ETF found itself holding large stakes in some companies in the wake of big investor inflows, causing potential liquidity issues. The index is now being overhauled to address these issues. The most recent changes to the index tracked by the ETF, which came into force this month, saw the number of companies included rise dramatically to around 100.

This should mitigate any liquidity concerns while reducing the impact of any big share price moves in the portfolio, both positive and negative. Some may argue that the change “dilutes” exposure to the theme, however. In mid-April, just before the index shake-up, the iShares ETF had a 6.3 per cent position in Plug Power (DE:PLUG) and 5.7 per cent in Enphase Energy (US:ENPH). Other names in its top 10 holdings, each of which represented more than 4 per cent of its assets before the revamp, include popular ESG stock Vestas Wind Systems (CO:VWS).

The shake-up brings iShares Global Clean Energy closer to the Invesco fund in terms of portfolio diversification: the Invesco ETF had 125 holdings in mid-April. The ETFs have similar pricing, with an ongoing charges figure of 0.65 per cent for the iShares fund and a management fee of 0.6 per cent for the Invesco fund. Investors may wish to re-assess their geographical and sector weightings in the wake of the iShares ETF revamp.

What else does the data tell us?

The much derided value investment style has had a notable rebound in recent months, and this is reflected in ETF demand. As Morningstar notes in its analysis, US large-cap value ETFs took in some €2.6bn (£2.3bn) last quarter, with their growth-oriented peers seeing outflows. Sector plays are also notable, with investors buying into energy, financial services and technology ETFs (see chart). ETFs focused on regions struggling at this stage of the pandemic have also seen outflows, from Europe to Latin America.

“Risk-on sentiment was dominant as the rollout of Covid-19 vaccines and its positive impact on equity market valuations across the globe continued to buoy investors,” said Jose Garcia-Zarate, Morningstar associate director of passive strategies research. “However, the flows data shows investors making a differentiation between geographical areas based on the rate of success of local vaccination programmes. For example, eurozone large-cap equity, France equity, and Germany equity ETFs all saw outflows, and were the bottom three categories for flows in the first quarter.

“By contrast, US large-cap blend equity ETFs attracted a solid €6.7bn of inflows and even UK mid-cap equity ETFs found their way into the top 10. It is hard not to think that the eurozone has sorely lagged the US and UK in the administration of vaccines to its population and is paying the price in terms of investors' allocation preferences.”

He also noted that the shift toward ESG investments “continued apace”, with ESG ETFs taking in 43 per cent of the total flows into equity ETFs over the first quarter. This shift also hit some plain vanilla equity ETFs. US index trackers such as iShares Core S&P 500 UCITS ETF (CSP1) were hit by big outflows, although Morningstar attributed this in part to the fact that investors using mainstream S&P 500 ETFs had switched into their ESG equivalents.

As we discussed in the issue of 5 March, ESG versions of conventional ETFs come with vastly different approaches. Some can be highly similar to a regular index tracker, while others invest in an index with a much stricter approach.