ETFs In the UK Take a Big Hit Due to Pandemic with More Funds Flowing into Active Than Passive

ETFs In the UK Take a Big Hit Due to Pandemic with More Funds Flowing into Active Than Passive

Summary

  • In a reversal of the trend from the last couple of years, the number of active funds in operation in the market is more than passive funds
  • The top-performing actively managed ETFs in the UK since the beginning of 2020 have given a negative return between 15 to 20 per cent
  • The funds which invest in the non-equity class of assets like bonds and real estate have given positive returns since the beginning of this year

The ETF industry has been into turmoil since the beginning of 2020. Passive ETFs which were starting to gain prominence in the country following the weak performance of active fund management businesses in the past couple of years saw a trend reversal this year. The onset of the pandemic in the United Kingdom scared away a lot of investors in British investment funds. In the month of March, £9 billion was pulled out by investors when the markets crashed following the initial hit of the pandemic. The fixed-income funds were the worst hit with the net outflows amounting to £5.5 billion during the period, while equity funds saw an outflow of only £769 million despite the tanking of the stock markets. However, what is interesting to note is that in the first five months of 2020 a greater number of ETFs were liquidated than new ones launched, with the proportion of actively managed ones growing rapidly than the rest. On the return side, however, funds which invest in assets like real estate, fixed income instruments and gold have given positive returns since the beginning of this year, while all equity funds irrespective of management style have given negative returns.

The rising importance of active ETFs since the start of the year

In a reversal of the trend from the last couple of years, the number of active funds in operation in the market is more than passive funds. After March when roughly £9 billion flowed out of ETFs, the month of April saw a retail inflow of £4 billion coming into the sector, out of which nearly £2.7 billion came into the active funds while the rest went into the passive ones.

In a crisis period of the market like the present one, several investment opportunities arise that are generally not available when the market conditions are good. For example, certain dividend-paying stocks will see their average dividend yields rise exponentially when their prices takes a significant hit because of the market conditions. Similarly, companies with large debts on their books may find it difficult to survive through this difficult time as they will not be able to service their debts. This is thus a time which is best for bottom fishing and value picking. Passive funds with their rigid management styles will not be able to take advantage of this situation, and their investors would lease on an excellent value creation opportunity. On the other hand, an active fund manager would churn his portfolio to the most optimum combination to reduce his cost base and position himself to leapfrog when the market conditions improve.

The shift of investors this year from passive to actively managed funds seems to be an opportunistic move which could give good long term returns to them.

Top-performing passively managed index ETF’s

Ossiam FTSE 100 Minimum Variance UCITS ETF 1C – This fund tracks the top 100 stocks listed on the LSE optimized for the lowest possible risk. This ETF is currently quoted at £182.89 (6 Aug 2020 9.30 GMT) and has a 52-week high/ low of £210.75 and £145.06, respectively. The fund's expense ratio is 0.45 per cent per annum, and since the beginning of the year, it has given a return of -11.13 per cent, while in last 3 months it has given a return of 8.22 per cent.

UBS ETF (IE) MSCI UK IMI Socially Responsible UCITS ETF – This ETF tracks an MSCI index for British companies which are socially and/or environmentally responsible. It is currently quoted at £14.24 (6 Aug 2020 9.30 GMT) having a 52-week high/ low of £17.02 and £11.12, respectively. Its expense ratio is 0.28 per cent per annum, and since the beginning of the year, it has given a return of -12 per cent, while in 3 months it has given a return of 10.28 per cent.

Lyxor FTSE 100 UCITS ETF - Monthly Hedged to USD - This ETF tracks the top 100 stocks listed on the LSE and also hedges against the US$ every month as a risk strategy. This ETF is quoted at £85.91 on (6 Aug 2020 9.30 GMT) and has a 52-week high/ low of £108.38 and £76.46, respectively. This ETF has an expense ratio of 0.30 per cent per annum, and since the beginning of the year, it has given a return of -16.36 per cent, while in last three months its return has been -0.37 per cent.

Performance of passively managed bond ETFs

SPDR Barclays 15+ Year Gilt UCITS ETF - This ETF tracks Bloomberg Barclays UK Gilt 15+ index of British government bonds having a maturity of minimum 15 years. It is currently quoted at £81.93 (6 Aug 2020 9.30 GMT) having a 52-week high/ low of £83.76 and £70.56, respectively. Its expense ratio is 0.15 per cent per annum, and since the beginning of the year, it has given a return of 14.60 per cent while the last three months return stood at -2.82 per cent.

iShares MSCI Target UK Real Estate UCITS ETF - This fund MSCI UK IMI Liquid Real Estate index, it also uses UK Government inflation-linked bonds within the benchmark index to alleviate the impact of leverage and volatility. This ETF is currently quoted at £4.60 (6 Aug 2020 9.30 GMT) and has a 52-week high/ low of £5.45 and €3.93, respectively. The fund's expense ratio is 0.40 per cent per annum, and since the beginning of the year, it has given a return of -12.39 per cent, while in last three months the return stood at 6.13 per cent.

Outlook for the forthcoming six months for the ETF market in the UK

It is highly likely that the capital markets will remain volatile for the rest of the year as well. Funds who have been able to churn their portfolios to take advantage of the market crash in March may turn out to be superior return performer to their investors in the next half. ETFs invested in other asset classes apart from equities have performed relatively better during the first half of the year and may maintain their momentum until the equity market conditions improve.

 


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