Good afternoon and thank you for joining us today. I am Pierce Karkus, 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 Flowtraders. 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 top 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. Now 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, Kirst. And first of all, welcome, everybody, and thank you for being with us and taking time. And 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. And I think for ETFs, we've been through some small crises. But since 2,008, we've not been through a proper crisis. And 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, but also because it was the first time since 2,008 that we've really had a global market disruption market.
So 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 what happens if there's another 2,008. And I would say broadly speaking, we've seen that ETFs have passed that test or at least they passed what was thrown at them in March 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 and 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. And we can talk a little bit about what some of the dynamics that we saw as we go through this.
But I think that most importantly, it's that they give you the liquidity you want when you need it. But 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 2 months or 3 months, and that is the ETFs role within the broader underlying market for this concept of price discovery. And I think that we've really we've seen this in
the past. We've seen it
in the U. S. High yield market a number of times. We've never seen it more broadly, and particularly, we've never seen it in Europe. And that is where in the absence of many underlying bonds, in this case, in one case, trading, that ETFs continue to trade.
And 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 kind of what you might call the real price of risk. And 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.
And 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 growth, future growth in the European ETF market. But we also saw it in equities. There were several days when equity futures, S and P 500 futures were limit up or limit down. We even had a couple of instances where the S and P itself was halted in the afternoons, although the UK, the European afternoons. And for example, the iShares, each S and P 500, each have continued to trade.
So actually, funnily enough, became for what is the biggest deepest XT market in the world, it became the price discovery vehicle even in 2 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 kind of flowing and market visibility clear.
Thank you, Steve. Dennis, how have you experienced this period of volatility?
Hi, Kerst and everybody else. Steve, thanks for hosting the call and giving also us the opportunity to talk about kind of the resilience of the whole ETP ecosystem or ETF ecosystem during the kind of 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, the ETPs both traded on exchanges, but also on the MTFs. And as Steve said, that we there was continuous liquidity.
Also there, I think that the ecosystem and the close kind of collaboration kind of 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 kind of ETFs. There again, we have seen some kind of elevated volatility before, whether it's kind of the European crisis or in kind of 2011 or 2008. And again, I think had the ETFs leading by being exchange traded and even now more also kind of leading from a price discovery perspective. So we are and we took a lot of precautionary matters and prepared ourselves for periods like this. So 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 that 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. So they're very happy with the global performance of the whole ecosystem to date.
Thank you, Dennis. And could you perhaps also elaborate on the volumes that you've seen both on the primary versus the secondary markets?
Yes, definitely. That's a good question. So on average about a quarter of OR trading and that's 1,000,000,000 a day ends up in the primary market. So about 25% really is a create or redeem with the issuer. During the crisis, this went up significantly.
So also there, the role of a market maker and AP worked really, really well and also having an open ecosystem. So there's many market makers, many ultra participants who can do the trade redeems. So 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 other the other end of the trade. So 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.
So 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, yes. And I think just to build on Dennis' comments, I mean, I think just to give some sense of what we saw. I mean, we saw this significant increase. We saw record volumes across both primary and secondary. Our secondary volumes were 2 to 3 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 6 to 7 times what we would normally have seen this time in 2019. And bear in mind, 2019 was already a year where we had seen a natural organic increase in volumes anyway as the industry has grown. So I think that the scale of what Dennis was referring to is quite important for everyone to kind of to get that sense. And I think on the busiest day, we were something like ETS was something like 33%, 34% of the overall trading volume equity trading volume in Europe. So I think it really has shown that ETFs have kind of arrived as a vehicle.
And 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 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.
But 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. And ETFs are very, 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. So and that could well be something that is catalyzed even more by what we saw over the last kind of 2, 3 months by COVID.
In the more kind of in the institutional space, I mean, we I think we're seeing the evolution and much of this we've seen in pockets, but particularly we're seeing in the U. S. We're seeing the evolution of what we call kind of liquidity sleeves. So this is large institutions using ETFs increasingly to have a kind of a tactical sleeve or a tactical layer within their portfolio. So 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 2 to 3 months. There's need or feel of the need for liquidity in a portfolio and to have flexibility in the necessarily to necessarily to do anything. And I think that this feeling that actually liquidity sleeves can be a very valuable tactical tool. In a world of now 0 interest rates or negative interest rates pretty much everywhere, cash drag is a huge issue for portfolios. So holding kind of holding a traditional way of just having cash is now a big, big drag on portfolios, and particularly when you have kind of high liabilities because of what's happened also with rates coming down.
So that issue is a big issue for many and many investors. And so looking for cash alternatives, cash substitutes is obviously a big focus. So 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. So I'm effectively not going to hold cash. I'm going to hold I'm going to kind of hold a quasi portfolio, but in a very liquid tool.
So I'm going to try and get some of that core exposure, but with liquidity. And then I'd say probably the one that surprises a lot of people is, and we've seen this grow over the last 2 to 3 years, but it's really accelerated the last 3 months has been fixed income active managers using ETFs. And often people think that that sounds kind of strange. If you're an active manager, why are you paid to deliver alpha? Why are you using 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, they've used credit derivatives in the past. These are just yet another tool. And 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 kind of 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 2 to 3 months.
So we've had a range of clients globally now, fixed income managers who have tried out ETFs in the last 3 months, and it's been a good experience. And they're now talking about increasing their adoption of ETFs. So 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. And so it's just a great tool within that toolkit. So I think that is again, I think we also talked about ETFs, the number of use cases just continues to grow and grow as the investor base grows.
But I think the real capitalization that will come out of this crisis will be the acceleration by institution investors looking for liquidity sleeves, the adoption by fixed income investors. And 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. So 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?
Yes. Thanks, Kerst. Well, I think the most important price liquidity source is an actual exchange. And 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 kind of corporate credit or high yield, investment grade, the underlying markets might not be that easily tradable, prices might not be kind of as up to date.
So there is kind of a theoretical NAV, which reflects the value of the underlying portfolio. But it's of course, that's not tradable as we speak. So the ETF or the pricing of the ETF that's where the actual kind of tradable price of the portfolio is reflected in. So 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. So all that also there we've seen and that's also very visible for instance in the U.
S. In the kind of the high yield products that the high yield ETFs are kind of the main price source for the actual price of a portfolio or a certain asset class, because the ETF being the wrapper to a very broad basket of exposures, whether it's a euro credit or high yield. So also there, we've seen that investors do get very easy exposure to now liquid and tradable ETFs, which helped really, really, really well. And also there the ecosystem, so historically a big part of the ETFs being traded on RFQ platforms, which have been kind of evolved into regulated electronic ETC or OTC platforms like the MTS. So Bloomberg or Payvap or Qhub or some exchanges, they've built very efficient platforms to trade on the regulatory platform these products.
So also there, I think the ecosystem is regulated. It's very easy to trade and the products themselves are leading from a price discovery perspective because I said also in 2011 when the Greek markets were closed, the ETF, the drag was trading on the Greek exposures. And also there are for some emerging markets, whether it's equity or fixed income, ETFs and some parts of the underlying are not tradable, but ETF itself is and part of the exposure is to close markets. So there might be a deviation from a theoretical underlying price. But we've noticed that there are some kind of questions being raised about the difference between kind of the tradable price and a theoretical price.
But we have seen that investors are comfortable with the pricing mechanisms of ETFs there because they mimic the actual prices of the underlying very, very close. And also we've seen a lot of inflows in especially the fixed income ecosystem throughout this year especially. So also there, I think investors are getting much more comfortable with ETPs being a very easy liquid tradable product to get exposure to a certain underlying asset class for exposure.
And I'm just going to add on to what Dennis said. I think that I think this understanding around discounts is super important because there's been a lot written in the past around how discounts imply ETFs breaking or broken, when actually the premium discount mechanism is a core part of what makes ETFs actually work. And 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 bases to really educate people around this discount concept. Because I think what we find historically, 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 markets, volatile markets like what we're seeing, but more generally as well.
So 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. Like I think the European ETF market, there are still some areas where we would like to see more improvement in the kind of the overall infrastructure. It's something that we spend a lot of time with Dennis and his team on with we're engaging with regulators, etcetera. I think 2 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. And so you can it can be very difficult for, for example, Dennis' team to navigate that, which makes it difficult for clients to investors to navigate that. I think that we were definitely lagging the U. S.
Where you have more concentration of liquidity in 1 or 2 places, which I think is obviously beneficial. I think related to that, while MiFID II went a long way to helping us, we still 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, etcetera, but it's just not as clean as what we see in the U. S.
So 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. But I don't think that they are leading to a bad client experience. I just think there's more we can we would like to see to kind of take the market to the next level. Dennis?
So 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?
Yes. So a few things we also have noticed during previous crises is that we have seen new money coming into the ecosystem. So money previously invested via other vehicles coming into the kind of the ETP ecosystem, which is positive because it grows the AUM. And I think it also from kind of a product perspective, it's kind of the most rational a good rational decision. So also I have currently or over the last few years, we've seen an increasing interest in kind of sustainability themes and also a significant increase in either fixed income, but also equity ETFs.
So also there, I think it's a good opportunity for investors to kind of rethink the themes they want to get involved in. And then again, they're very comfortable with the ETF ecosystem or repower vehicle to get exposure to those kind of themes. So whether it's like the kind of the equity sector ETFs, which are really big in the U. S. Investors are all more and more interested in more tailor made indices with who take they take into account sustainability or other themes.
And especially sustainability is a big theme and it's an easy way for investors to kind of switch from a certain exposure into another or kind of make at a reasonable kind of with minimal impact kind of conscious decision how they want to allocate their exposures via these ETFs.
So talk about markets. Before your current role, you were achieved investment strategies. So putting on your old work hat, what's your view on markets? Do you see them evolve? And what are flows telling us?
Take me back, Christ. So I think the flows have been very interesting. It's we look at the ETF flows, for example, we've really seen I mean, it's been dominated by fixed income. The outflows that we saw in global ETFs from the kind of 4th week of February through to really the 4th week of March actually, which was when the Fed first announced QE of corporate bonds was really dominated by fixed income. And 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 2 places where we've seen the most flow. Obviously, it was the places where we also see them saw the most outflows as well. So 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 kind of single line corporates, that it's again, you saw something like LQD spike like 1.5 points on that news just last night. So 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 and ultimately in the kind of event we are talking about where you're having you're raising significant solvency risks, then capital structure is going to be important. And also, let's face it, you have the Fed now supporting the investment grade market and the upper side upper end of the high yield market. So I think that really does tie to continuing to look at those as kind of the carry trades.
I would say the other flow that we've seen has been away from broad markets into more sectors. So for example, we've seen a lot of interest in health care and tech, which are 2 areas where we like. Starting to see interesting consumer staples, which is an area we looks interesting given valuations and look at retail sales today. So there's clearly, if we continue to see, I think there's huge uncertainty still, but if but we do see, at least in short term, to be seeing a faster than expected kind of pickup 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 some interest. I mean, I do think overall this uncertainty is going to remain. I think 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 3 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're at. But having said that, as long as you have strong central bank support on these fiscal packages, it's they have pretty powerful support for risk at the moment and particularly with interest rates at 0, which is not going to move for a very long time as you saw from the Fed last week.
Thank you, Steve. And 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 Blackhawk relationship manager if you still have any questions that you would like us to follow-up on. And be well, everyone. Thank you. And with that, we will conclude this call.
Thank you very much.
Thank you.