Good afternoon, thank you for joining us today. I am Piers Koukas, Head of iShares Institutional Sales for Continental Europe, and it is my pleasure to be joined today by Steve Cohen, Head of EMEA iShares and Index Investments, and Dennis Dijkstra, CEO of Flow Traders. Before we get started with Dennis and Steve, just a couple of programming details. If you have any questions during the session, please submit them via the pop-up on the screen. We are going to get to a few topics raised by the audience. If we don't cover your specific question, your relationship manager will follow up with you afterwards. Without further ado, let's get started with Steve and Dennis. Gentlemen, thank you for joining us today. You both witnessed market crisis before, but until now, none of us had been through a pandemic.
This created massive volatility, as we've seen, and the past couple of months have been the biggest test for ETFs. Steve, what can we learn from this period about the resilience of ETFs?
Great. Thanks, Piers. First of all, welcome everybody, and thank you for being with us and taking time. Thank you also to my guest, Dennis, for joining me. Look, I think that you said it pretty right. We've been through some crises. We've never been through a pandemic. I think for ETFs, we've been through some small crises, but since 2008, we've not been through a proper crisis. I think that March, April 2020 will go down as being a proper crisis. Specifically because clearly we had huge volatility, huge market sell-off, and also very dislocated market participants, given what was going on. Also because it was the first time since 2008 that we've really had a global market disruption and market volatility of the scale that we saw, with ETFs now at the size that they are in the market.
I think that in some ways, this is kind of the test that people have been waiting for. It's definitely a test of fixed income ETFs specifically, which people have been kind of asking about, "Well, what happens if there's another 2008?" I would say, broadly speaking, that we've seen that ETFs have passed that test, or at least they've passed what was thrown at them in March and April. I think we saw that in a number of ways. First of all, they did what people expect, and I think at the end of the day, the core most important thing is that ETFs do what you expect them to do, and that means that you're able to trade them when you want to trade them. You're able to utilize them to adjust portfolios, that there is liquidity, and ultimately there's a price.
We can talk a little bit about some of the dynamics that we saw as we go through this. I think that most importantly it's that they give you the liquidity you want when you need it. There is a secondary point that you made earlier on, which I think we've started to see come through in the crisis of the last two months or three months, and that is the ETFs role within the broader underlying market for this concept of price discovery. I think that we've seen this in the past, we've seen it in the U.S. high yield market a number of times, but we've never seen it more broadly, and particularly, we've never seen it in Europe. That is where, in the absence of many underlying bonds, in one case, trading, that ETFs continued to trade.
They really helped market participants, whether you're a market maker, a bond trader, or an investor, understand what actually was really going on in the market, what was what you might call the real price of risk. I think that is a function we've talked about in the past. As I say, we've seen it in U.S. high yield, but we've never really seen it more broadly. I think this is the first time we saw it happen globally all at the same time, especially here in Europe, which I think is a good sign for the future growth of the European ETF market. We also saw it in equities. There were several days when equity futures, S&P 500 futures were limit up or limit down. We even had a couple of instances where the S&P itself was halted in the afternoons or the European afternoons.
For example, the iShares, each S&P 500 ETF continued to trade. Actually, funnily enough, became for the biggest, deepest equity market in the world, it became the price discovery vehicle, even in two instances in U.S. hours, for the market, which I think is a real testament to the growth of what we've seen in ETFs and the role that they now play, not just as vehicles themselves, but also as helping to keep markets flowing and market visibility clear.
Thank you, Steve. Dennis, how have you experienced this period of volatility?
Hi, Kirsten and everybody else. Steve, thanks for hosting the call and giving also us the opportunity to talk about the resilience of the whole ETP ecosystem or ETF ecosystem during the markets the last few months. Also there, I think the markets and the industry as a whole has benefited from the open ecosystem it has. Also being highly regulated, so also there, ETPs both traded on exchanges but also on the MTFs. As Steve said, there was continuous liquidity. Also there, I think that the ecosystem and the close collaboration with all the parties involved, so that's the exchanges, but also the issuers, the market makers, made sure that there was continuous liquidity, both in equity but also in the fixed income ETFs. There again, we have seen some kind of elevated volatility before, whether it's kind of the European crisis or in 2011 or 2008.
Again, I think had the ETFs leading by being exchange traded, and even now more also kind of leading from a price discovery perspective. We took a lot of precautionary measures and prepared ourselves for periods like this. Also there, also benefiting from ETFs being a global industry helps. I think a lot went well. I think there's also, of course, always a few things that can be done better. I think one of the things was kind of the working from home, and not being able to move people around, that kind of was a challenge, but I think everybody managed really well. They're very happy with the global performance of the whole ecosystem to date.
Thank you, Dennis. Could you perhaps also elaborate on the volumes that you've seen, both on the primary versus the secondary markets?
Yeah, definitely. That's a good question. On average, about a quarter of all our trading, that's like $1 billion today, ends up in the primary market. About 25% really is a create or redeem with the issuer. During the crisis, this went up significantly, also there, the role of a market maker, an AP, worked really well and also having an open ecosystem. There's many market makers, many [uncertain] participants who can do the create redeems. You also see that we have the ability as a group to really facilitate both the in and outflow, but on top of that, also absorb a lot of liquidity and kind of match the other end of the trade.
I think also in the kind of elevated period, and especially in March, we saw are in line with the increase in trading, also a slight increase in our primary market activity.
ETF trading volumes reached new records during the volatility spike. Steve, could you perhaps please give us some examples on how investors have been using ETFs during this period?
Absolutely. Yeah. I think just to build on Dennis's comments, I think just to give some sense of what we saw. We saw this significant increase, and we saw record volumes across both primary and secondary. Our secondary volumes were two to three times what we would normally have expected. In fact, if you look at many of our flagship credit ETFs, we were on the busiest day, six to seven times what we would normally have seen this time in 2019. Bear in mind, 2019 was already a year where we had seen a natural organic increase in volumes, anyway, as the industry has grown. I think the scale of what Dennis was referring to, it's quite important for everyone to get that sense.
I think on the busiest day, we were something like, ETFs are something like 33%, 34% of the overall equity trading volume in Europe. I think it really has shown that ETFs have kind of arrived as a vehicle. We're seeing that in the different ways that investors are using them. Some of them are very obvious. They won't be a surprise to anybody. Some of them may come as a bit of a surprise. I think the more obvious one is that increasingly, ETFs have become more of a core position for investors. We're seeing that in terms of wealth investors, wealth managers using them within discretionary portfolios. We're starting to see them emerge into advisory propositions, particularly they're making up a big part of model portfolios.
One of the things that is coming out of the crisis is an acceleration of online brokerage in Europe, which is going to be really interesting to watch because historically, we've lagged the U.S. in terms of this brokerage, kind of retail brokerage kind of mentality, as well as infrastructure. We've seen a big increase acceleration in online brokerage sign-ups. We're seeing a number of online brokers or wealth managers launching brokerage offerings to retail investors and wealth investors. ETFs are very central to that. They typically are forming a big part, not just of the brokerage, but particularly of any sort of kind of models offering that sits on those platforms. That could well be something that is catalyzed even more by what we saw over the last two, three months by COVID.
In the more kind of in the institutional space, I think we're seeing the evolution and much of this we've seen in pockets, but particularly we've seen in the U.S., we're seeing the evolution of what we call kind of liquidity sleeves. This is large institutions, using ETFs increasingly to have a kind of a tactical sleeve or a tactical layer within their portfolio.
Not just in the core of the portfolio where they may be using them to bring down kind of overall costs, but also to have this ability to tap liquidity and I think this is something that has come out in many of the conversations we've had with clients over the last two to three months, this need or feel of the need for full liquidity in a portfolio, and to have flexibility in the portfolio to be able to react quickly to what is going on. I think many people saw the market drop so fast and then rebounded so fast that many investors didn't have time necessarily to do anything.
I think that this feeling that actually liquidity sleeves can be a very valuable tactical tool. In a world of now zero interest rates or negative interest rates pretty much everywhere, cash drag is a huge issue for portfolios. Holding a traditional way of just having cash, is now a big drag on portfolios, and particularly when you have high liabilities because of what's happened also with rates coming down. That issue is a big issue for many investors. Looking for cash alternatives, cash substitutes, is obviously a big focus. One way, it's not a cash substitute, but one way is to say, well, I'll try and mimic a big chunk of my portfolio, but I'll do it in a tool or an ETF where I can get liquidity if I need it. I'm effectively not going to hold cash.
I'm going to hold a quasi- portfolio, but in a very liquid tool. I'm going to try and get some of that core exposure, but with liquidity. Then I'd say probably the one that surprises a lot of people is, and we've seen this grow over the last two to three years, but it's really accelerated in the last three months, has been fixed income active managers using ETFs. Often people think that that sounds kind of strange. If you're an active manager, you're paid to deliver alpha, y are you using an ETF? I think increasingly as ETFs in general, but fixed income ETFs specifically, have become more granular. They've become bigger. They've become more liquid.
It has opened the door for many active fixed income managers to use them in the same way they've used futures in the past and they've used credit derivatives in the past. These are just yet another tool. I think part of that is breaking down the psychology of thinking of ETFs historically as a passive instrument and a fund, that an active manager, that's the antithesis of what I should be using versus actually thinking of ETFs just as a really efficient tool. And we saw that over the last two to three months. We've had a range of clients globally now, fixed income managers who have tried out ETFs in the last three months. It's been a good experience and they're now talking about increasing their adoption of ETFs.
I think we will continue to see more and more what you historically would have called active managers using ETFs as just yet another tool in the toolkit to try and deliver alpha because ultimately their active returns are being driven by factor exposures and asset exposures as well as kind of single line alpha. It's just a great tool within that toolkit. I think that is, again, I think we always talk about ETFs, just the number of use cases just continues to grow and grow as the investor base grows. I think the real catalyzation that will come out of this crisis will be the acceleration by institutional investors looking for liquidity sleeves, the adoption by fixed income investors.
I think something to watch, which I think is this growth of the kind of online wealth industry, which I think will accelerate usage of ETFs within the wealth and the retail markets as well.
Thank you, Steve. Let's focus on some of the trading aspects of ETFs. There have been a lot of comments recently about ETFs trading at a discount. Dennis, what does that really mean, and why has there been so much noise around this?
Yeah. Thanks, [uncertain]. Well, I think the most important price liquidity source is an actual exchange. When people talk about products, especially ETFs trading at a discount versus something, and it's predominantly their kind of theoretical value, what it means is that for some underlying markets like fixed income, whether it's especially corporate credit or high yield, investment grade, the underlying markets might not be that easily tradable. Prices might not be as up-to-date. There is kind of a theoretical NAV, which reflects the value of the underlying portfolio, but of course, that's not tradable as we speak. The ETF or the pricing of the ETF, that's where the actual kind of tradable price of the portfolio is reflected in.
There's always a difference between the theoretical value of an ETF, and especially fixed income, that's where it's been the most important problem versus the actual tradable price. Also there we've seen, and that's also very visible, for instance, in the U.S. in the high-yield products, that the high-yield ETFs are the main price source for the actual price of a portfolio or a certain asset class. That's because the ETF being the repricer to a very broad basket of exposures, whether it's a Euro credit or high yield. Also there, we've seen that investors do get very easy exposure to now liquid and tradable ETFs, which help really well. Also the ecosystem, so historically a big part of the ETFs being traded on RFQ platforms, which have been kind of evolved into regulated electronic ETP or OTC platforms like the MTS.
At Bloomberg or Tradeweb or RFQ-hub or some exchanges, they've built very efficient platforms to trade on the regulatory platform these products. Also there, I think that the ecosystem is regulated, is very easy to trade, and the products themselves are leading from a price discovery perspective because as said, also in 2011, when the Greek markets were closed, the ETF, the GREK was trading on the Greek exposures. Also there for some emerging markets, whether it's equity or fixed income, ETFs, some parts of the underlying are not tradable, but the ETF itself is, and part of the exposure is to close markets. There might be a deviation from a theoretical underlying price. We've noticed that there are some kind of questions being raised about the difference between the tradable price and a theoretical price.
We have seen that investors are comfortable with the pricing mechanisms of ETFs. They mimic the actual prices of the underlying very close. We've seen a lot of inflows in especially the fixed income ecosystem throughout this year especially. Also there, I think investors are getting much more comfortable with ETPs being a very easy, liquid, tradable product to get exposure to a sort of underlying asset class or exposure.
I'm just going to add on to what Dennis said. I think this understanding around discounts is super important because there's been a lot written in the past around how discounts imply ETFs are breaking or broken, when actually the premium discount mechanism is a core part of what makes ETFs actually work. We saw as rapid shifts to premiums when markets went up as we saw to discounts when markets went down. I think there's been a lot of really great work done across a number of places to really educate people around this discount concept, because I think what we find historically is, again, the more people become comfortable with what this is and how it works, it really opens up the door to thinking about how to use ETFs, and particularly not just in volatile markets like what we've seen, but more generally as well.
Perhaps I may throw in a question from the audience, which is stated as follows: This all seems positive, but in which areas do you have perceived difficulties? Where are the challenges for this market? Steve, perhaps you could share your view on that.
I think I'll give you some thoughts on, I guess, challenges. I think the European ETF market, there are still some areas where we would like to see more improvement in the overall infrastructure. It's something that we spend a lot of time with Dennis and his team on. We're engaging with regulators, et cetera. I think two probably I would highlight. I think one is the market remains fairly fragmented. There's a lot of different exchanges. Every exchange has different rules. It can be very difficult for example, Dennis's team to navigate that, which makes it difficult for clients, investors to navigate that. I think that we're definitely lagging the U.S., where you have more concentration of liquidity in one or two places, which I think is obviously beneficial.
I think related to that, while MiFID II went a long way to helping us, we don't have a consolidated tape. There's not one place where you can go to see everything in one place. Obviously, there are ways to do it using certain kind of analytics, et cetera, but it's just not as clean as what we see in the U.S. I think there are a couple of infrastructure things which, again, we'd love to see them improve because I think the more they improve, the better the client experience. I don't think that they are leading to a bad client experience. I just think there's more we would like to see to take the market to the next level. Dennis?
We've seen a lot of portfolio allocation changes as the market was moving drastically. At the same time, sustainability has never been mentioned as much as it is now. Dennis, do you think there is a correlation between these two, and how do you see this going forward?
Yeah. A few things we also have noticed during previous crisis stages, that we have seen new money coming into the ecosystem. Money previously invested via other vehicles coming into the ETP ecosystem, which is positive because it grows the AUM. I think also from a product perspective, it's the most rational or a good rational decision. Also currently or over the last few years, we've seen an increase in interest in sustainability themes, and also a significant increase in either fixed income but also equity ETFs. Also there, I think it's a good opportunity for investors to rethink the themes they want to get involved in. Again, they're very comfortable with the ETF ecosystem or vehicle to get exposure to those kind of themes.
Whether it's the equity sector ETFs, which are really big in the U.S., investors are all more and more interested in more tailor-made indices they take into account sustainability or other themes, and especially sustainability is a big theme. It's an easy way for investors to switch from a certain exposure into another or make at a reasonable, with minimal impact, conscious decision how they want to allocate their exposures via these ETFs.
Talking about markets, before your current role, you were a chief investment strategist. Putting on your old work hat, what's your view on markets? How do you see them evolve and what are flows telling us?
You take me back, Kirst. I think the flows have been very interesting. If we look at the ETF flows, for example, we've really seen it's been dominated by fixed income. The outflows that we saw in global ETFs from the fourth week of February through to really the fourth week of March, actually, which was when the Fed first announced QE of corporate bonds, was really dominated by fixed income. Equities, if anything, were quite calm, I have to say, considering what was going on. Similarly, the rebound has been very much dominated by fixed income. It's been dominated by credit and investment-grade credit, high yield, have really been the two places where we've seen the most flow, obviously, with the places where we also saw the most outflows as well. Kind of what goes out, in a way comes back in.
I think that the market, the investor reaction to the Fed has been really notable, and we continue to see that, even yesterday, where obviously, when the Fed announced the additional kind of QE buying of single line corporates, that again, you saw something like LQD spike like 1.5 points on that news just last night. I think the first theme we've seen has been buying of credit. That definitely ties to our view, but my personal view, which is, I think that it's about capital structure. Obviously in the kind of event we are talking about where you're raising significant solvency risks, then capital structure is going to be important. Also, let's face it, you have the Fed now supporting the investment grade market and the upper end of the high yield market.
I think that really does tie to continuing to look at those as the carry trades. I would say the other flow that we've seen has been away from broad markets into more sectors. For example, we've seen a lot of interest in healthcare and tech, which are two areas where we might start to see interest in consumer staples, which is an area that looks interesting given valuations and you look at retail sales today. There's clearly, if we continue to see I think there's huge uncertainty still, but we do seem, at least in short term, to be seeing a faster than expected kind of pick up in some of the activity. I think that can help sectors like consumer staples. I think overall, and you have some laggards like European equities where we're starting to see interest.
I do think overall this uncertainty is going to remain. I think the caution that we've broadly seen amongst investors in equities is very much kind of warranted. A lot of news is out there. Markets obviously remain very volatile. You've seen it in the last three days. I still think there's a huge amount of uncertainty around how much economic activity picks back up to the kind of levels that we were at. Having said that, as long as you have strong central bank support on these fiscal packages, they're pretty powerful support for risk at the moment, and particularly with interest rates at zero, which is not going to move for a very long time, as we saw from the Fed last week.
Thank you, Steve. Dennis, we covered a lot of ground in this call. Thank you for joining today's call to share your thoughts. To all our participants, thank you also for spending this time with us and for your ongoing partnership. I'm still working from home. I hope nobody got disturbed by my daughter who decided to play some piano, despite the ask to keep it fairly silent. All in all, please get in touch with your BlackRock relationship manager if you still have any questions that you would like us to follow up on. Be well, everyone. Thank you. With that, we will conclude this call. Thank you very much.
Thank you.