News Summary Analysis

October 27, 2014

European ETF Investors Dive Into Financials
The London Stock Exchange has launched a new segment that will allow non-UCITS ETFs to be launched and traded.

The new segment, called IECR, comes on the back of client demand and is anticipated to appeal to institutional investors, according to a spokeswoman from the LSE.

The new IECR segment will see the products listed settle in CREST. There is also a pan-European option called EUET, which will settle the products in Euroclear Bank utilising the Euroclear Bank Settlement trading service for ETFs.

While most—in the region of 95 percent—of the ETFs in Europe are UCITS compliant, there are still products, such as open ended funds, that are exchange traded but not considered UCITS. Having UCITS approval was previously a requirement for ETFs to gain admission to the London Stock Exchange. However, the UK Listing Authority allows for UCITS and non-UCITS ETFs to be listed, so long as they comply with the relevant regulation.

Investors Flee From Russian ETFs
ETFs tracking Russia saw 10 straight weeks of outflows as investors unloaded their assets amid the recent wave of sanctions against that country.

Outflows wiped out inflows seen in April and May when investors saw the falling value of Russian assets as a buying opportunity.

The 10 weeks of outflows from Russian ETFs have intensified with the attack on Malaysian Airlines flight MH17, whose downing over Ukraine coincided with the largest weekly outflow out of Russian ETFs in over six months.

Notably, Source’s RDX UCITS ETF lost over $100 million of assets in July, essentially halving the fund’s aggregate AUM.

US-based investors also wasted little time unloading Russian assets. The Market Vectors Russia ETF Trust, the largest Russian focused ETF, saw $90 million of outflows in July.

Russia most recently announced that it will ban or limit food imports from countries that imposed sanctions on Moscow. The countries that have imposed sanctions on Russia for supporting rebels in eastern Ukraine include the US, the EU, Canada, Norway and Australia.

A note from Markit said: “The mounting tension in Ukraine has seen harsh measures imposed on high ranking Russian officials and the institutions they control. This, along with far ranging sanctions forbidding the import of technology into the country and blocking their financial institutions from capital markets both in the US and Europe, has seen a dramatic shift in investor sentiment. With no sign of any swift resolution to the situation, we reveal the details of the recent bout of negativity in the country’s assets.”

LSE Launches New Segment For Non-UCITS ETFs
European ETF investors have piled into financials, energy and real estate this year, while industrials and communications have fallen out of favour, new data on flows has revealed.

According to figures from Morningstar, European investors have poured €904.8 million into financial sector ETFs year to date, €519.1 million into energy and €474.3 million into real estate.

Sector ETFs have become increasingly popular as they allow investors to target their asset allocation more precisely and make tactical bets, rather than just settle with a general regional tracker to access the market.

Banking ETFs top the list, having posted solid gains over the past 12 months despite being faced with many threats to their share price, from dark pool trading investigations, product mis-selling and fines over benchmark manipulation. Europe’s banks as a whole have delivered 90 percent returns to investors since March 2009, according to derivatives trading platform IG Group.

Ben Seager-Scott, senior analyst at advisory firm Bestinvest, said the financial sector can be notoriously volatile.

“Some investors, with good reason, worry that the upcoming asset quality review and stress testing by the European Central Bank will show the banking system to be undercapitalised, which would put pressure on this sector,” he said.



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