Single strategy ETFs rise in Europe despite ‘risk’

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 Edition.

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,” said 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 American 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,” Schnurrenberger pointed out.

The report’s other findings include:

• Europe’s ETF industry posted net inflows for the third-consecutive month in September, gathering €3.8bn (US$4.3bn). This takes the year-to-date (YTD) net inflows to €26.9bn. Cerulli notes that even though ETFs are making a recovery, YTD net inflows are significantly down on the €66.1bn 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$13bn) at the end of September. Mixed-asset funds were hardest hit, recording net outflows of £1.6bn, followed by money market funds (-£0.5bn) and equity funds (-£0.4bn).