New assets going into European ETFs in H1 almost equalled 2019’s full year inflows as investors piled into the wrapper to capitalise on the COVID-19 recovery.
According to data from Bloomberg Intelligence, ETFs in Europe saw $109bn inflows in H1, just shy of the record $120bn inflows for the whole of 2020.
Although the news cycle focused largely on rising inflation and the triumphant bounce back of cyclical stocks, readers’ fascination with products targeting industries of the future spilled over from the previous year.
Clean energy ETFs, in particular, was a big focus for investors as S&P Dow Jones Indices (SPDJI) issued a consultation with the market to change the underlying index of two BlackRock ETFs that had seen significant inflows and delivered huge returns in 2020.
From analysis of the popular thematic investments to delivery mechanisms on gold ETFs, here are ETF Stream’s most read stories of the first half.
1. Clean energy ETFs are a painful reminder of the costs of investing too early
Topping the list is an analysis of clean energy ETFs’ historical performance.
With the world’s two largest products within the theme, the iShares Global Clean Energy ETF (ICLN) and iShares Global Clean Energy UCITS ETF (INRG) finishing 2020 more than 11 times the size they began the year, investors saw triple-digit returns in the calendar year.
However, taking a longer-term look at ETFs within the product class, many are down more than 50% since their inception, even following last year’s impressive run, illustrating it is perhaps even worse to be too early than too late to invest in a future theme.
2. BlackRock clean energy ETF index to triple in size following SPDJI consultation
Unfortunately for BlackRock, the meteoric rise of their clean energy ETFs introduced new problems associated with vast sums of assets pouring into a concentrated basket of small and mid-cap equities.
To address this, SPDJI set about editing the index methodology for the Global Clean Energy index, extending its constituent count to 82 and its constituent target to 100 stocks.
With this, SPDJI was able to fix the immediate burst pipe in their outdated index – but at the expense of considerably reducing the intensity of exposure to clean energy pure play stocks.
3. Royal Mint ends physical delivery agreement on WisdomTree’s gold ETC
Having launched its own ETF in partnership with HANetf, the Royal Mint Physical Gold Securities ETC (RMAU), the Royal Mint decided to end its eight-year physical delivery agreement on WisdomTree’s Gold Bullion Securities (GBS).
Although other WisdomTree products can deliver gold to banks and financial institutions across Europe, GBS’s appeal among retail investors will likely have waned.
Redemptions can no longer be done in the form of gold coins and are only available through a London Bullion Market Association (LBMA) channel into an unallocated account – which incurs some credit risk for the LBMA member.
4. Record demand for clean energy ETFs causing liquidity risks
Our penultimate story sets the scene for SPDJI’s index expansion, laying out the liquidity and over-concentration risks faced by BlackRock’s ETFs.
With large sums of money being pumped into a handful of small companies, a report by Société Générale detailed potential buying and selling pressures during semi-annual index rebalances, with large reweighting trades expected to take weeks to settle, based on constituents’ average trading volumes.
SPDJI agreed to launch consultations to discuss its weighting methodology – but the scenario points to potential issues when ETFs own too much of an individual security, or the consequences of a strategy getting too hot, too quickly.
5. LGIM launches Europe’s first hydrogen economy ETF
Finally, in keeping with the previous year’s focus on new product launches, readers were interested in Legal and General Investment Management’s (LGIM) thematic entry, targeting a much-fabled segment of the clean energy industry.
Debuting in February, the L&G Hydrogen Economy UCITS ETF (HTWO) tracks the Solactive Hydrogen Economy index, which offers exposure to companies involved in electrolyser and fuel-cell manufacturing, hydrogen production, specialist mobility providers and key industrial and utility companies with a minimum market cap of $200m.
