By May this year, demand in ETFs increased by more than two folds in Italy. What is driving net inflows? SSGA’s Francesco Lomartire explains his view to Alicia Villegas
A substantial appetite for ETFs amongst Italian professional investors has led to a skyrocketing net inflows so far this year.
According to data released by Borsa Italiana in the first five months of 2017, about €7bn of net inflows went into ETFs listed on the Italian exchange, compared to the €3.2bn raised during the entirety of 2016, which has boosted ETF AUM to €56bn – a growth of 14% year-to-date.
Commenting on this jump in ETFs’ demand, Francesco Lomartire (pictured), head of SPDR ETFs Italy at State Street Global Advisors, notes that it is likely driven by an effort to address end-investors’ demand for efficient and lower cost products.
“Indeed we observed an increased interest towards ETFs from both intermediary and pure institutional clients, such as pension funds or foundations,” Lomartire explains.
“The former continue to seek lower cost exposures in order to build asset allocation solutions that are competitive in a low yield/low growth environment.
“The latter are finding in ETFs a source of investment tools to help them broaden their traditional asset allocation with the inclusion of higher yielding segments of the fixed income market or more thematic equity exposures.”
Lomartire also highlights that ETFs allow portfolio managers to promptly react to any market event with full access to the underlying risk and visibility to the implied target returns, owing to the transparency of underlying holdings.
“Furthermore, ETFs have the ability to help fund selectors identify real drivers of alpha among the managers they are considering,” he adds.
FIXED INCOME EXPOSURE
Institutional investors tend to prefer fixed income exposures via ETFs, due to their ability to offer “easy access” to underlying liquidity during highly competitive conditions through the secondary market, which is often seen as being more convenient than buying the underlying bonds, Lomartire says.
“This has particularly been the case for corporate investment grade, high yield, and emerging market government bonds in the past few years,” he notes.
He adds that smart beta solutions are experimenting a “growing interest”, while “sophisticated investors” are also using a sector rotation strategy for tactical bets or to implement market views more systematically.
In regards to retail investors, Lomartire argues they typically prefer ETFs to those asset classes that are difficult for active managers to outperform or for thematic exposures.
“It is difficult to say how retail clients systematically approach ETFs, but from what I get during my discussions with private bankers and IFAs, who have a direct connection with retail investors, it seems that often research is driven by the client asking their advisor to analyse a specific ETF, usually against a pool of mutual funds,” he explains.
Lomartire does not see ETFs’ demand affected negatively by Italian investors’ typical risk aversion, as long as personal advisors and retail product providers give investors a full overview of their investment options, including passive, with a precise risk profile.
“We know it will be a long and challenging process to educate end clients, but we trust the fiduciary role intermediaries play, and the additional protection granted by the incoming MiFID II will likely further increase demand of ETFs,” he says.
DEATH OF THE STOCK PICKER?
With global ETF asset growth hitting records — exchange-traded funds and exchange-traded products listed globally reached $4.103 trn in AUM at the end of May 2017 – industry debate over active versus passive investing prevails.
Asked if the ETF’s growth story would lead to the “death of the stock picker” as a profession, Lomartire’s response is clear: “Absolutely not.”
“Clients and issuers are continuously looking for new investment ideas and interesting themes to better use existing ETFs and stock pickers still represent an important source of market views and trends, therefore they will continue to have an important role to support the search for alpha” he says.
“Passive providers are not fighting against active managers, instead they are granting them additional tools to implement their tactical allocation views, as finding alpha becomes more and more complex and asset allocation explains a large part of active returns.”