Deborah Fuhr Welcome to ETF TV, I’m Deborah Fuhr. Today, we’re going to be discussing recent flows into gold, ESG thematics, and some regulatory changes that are on the horizon for ETFs.
Dan Barnes And I’m Dan Barnes, and joining us today is Jim Goldie, head of ETF Capital Markets for EMEA at Invesco. Jim, welcome to ETF TV.
Jim Goldie Hi, guys. Thanks for having me.
Dan Barnes So we’ve seen commodity net inflows of five billion in June, 54 billion overall year to date. And of those, 37 billion have been net new inflows into gold products. Jim, how do you see investor interest in the gold market being expressed in terms of the instruments being used?
Jim Goldie It’s certainly been a very interesting time for gold over the past few months. And the coronavirus outbreak brought a large spike in demand for safe haven assets such as gold, as you mentioned. But at the same time, we saw an unprecedented dislocation between gold futures and the spot market, which the majority of the ETCs track. And the reason for this was that the bulk of the physical or spot metal was traded in London, and the bulk of the futures contracts are traded in New York. And normally this isn’t a problem. You just go from one location to the other. A lot of those flights were grounded as we all went into lockdown. So this brought around a fear that there wouldn’t be enough metal in New York to make delivery on the potential futures contracts.
What happened on the back of it is that we saw the futures price spike to about 80 dollars per ounce. Now, as a result, we’ve seen a huge increase in metal being stored in New York. And this has settled some of the concern. But we’ve still seen issues around liquidity on the future side of things, where the open interest at the start of the year, we saw drop by almost 50% as a lot of people just didn’t want to take on the risk of the price uncertainty that we were experiencing throughout this dislocation. At the same time, we’ve seen the demand for gold ETCs, as you mentioned, dramatically increase, and then the AUM in gold-backed ETF or ETPs has increased two-fold from 100 billion two years ago, to now over 200 billion. And then as a result, we’ve had a number of discussions recently with clients who have never used ETFs before or ETPs, that are now looking at using the ETPs to access their gold exposure vs the futures which they would normally use.
Deborah Fuhr The other area that we’re seeing increasing demand is ESG and thematics, how do you see that playing out when you look at what your investors are doing?
Jim Goldie There’s no doubt there’s been huge demand for ESG on a global level. It started a mere few years ago, and now we’re starting to see that translate to demand in the US as well. We launched our first fixed income ESG ETF this year, and we also launched our first synthetically backed, ESG equity ETF this year. If you look at the two month period that started around the coronavirus outbreak in March, there was huge outflows across asset classes in equity and fixed income, but if you look at flows into ESG ETFs, they actually increased over that period. And it shows that the ESG ETFs are being used as more strategic allocations across the investor spectrum, which the retail clients have bought the ESG ETFs, as well as huge institutional investors. At the same time, we’ve also seen a large increase in product innovation and product development. There was a number of different products to access ESG exposure. So we would expect ESG is going to be something that will stick around for a long time and clients will soon start to use ESG more and more for their strategic allocations.
Deborah Fuhr We’re seeing that regulations are having an impact on products and also where and how investors are investing. There are some other regulatory changes that are happening in Europe. Can you talk to us about the ones that you think will be important going forward?
Jim Goldie Brexit has seen the industry move from the local CSD settlement model into the international ICSD model. That’s something that a lot of issuers had done prior to the Brexit announcement. But we’re seeing a lot of movement now from the issuers that hadn’t moved previously that are now migrating their settlement models to the ICSD settlement model. One of the main pieces of regulation that has come into play in February next year is the CSDR regulation. And this is the aim of harmonizing settlement by reducing settlement times and reducing the number of fills via mandatory buy-ins and cash penalties for failing trades. This is something that’s not ETF-specific or ETP-specific, that will also impact equities and bonds as well. Now there’s a number of different nuances; if you think of how ETFs are listed, you could have 15 or more different listings of a given fund if you could counter-hedge share classes, accumulating distributing. Those products can be listed from Mexico to Hong Kong and everywhere in between. Now as a result, you would naturally see more ETF trades fail, which, if they were to be captured under the new regime, could be potentially problematic for the industry.
Currently, we are starting to see settlement rates improve along with the ICSD model that’s helping things there. It makes the realignment between all those different listings and share classes a bit more streamlined. As part Brexit, the UK will not be captured in the regime. This creates challenges because you can have all your UK listings or LSE-listed securities, ETFs, bonds that are not captured by the regime, and all of the other EU listings of the same fund would be captured. So that is something that we need to work through. On top of this, as part of the regime, you have to appoint a buy-in agent that manages that mandatory buying process. Currently, there is only one firm that is able to act in this capacity and their solution is a European-focused one. It’s not a global one. And the buy-in process itself would take place by midday. Now, if you can imagine a lot of the global asset managers that have US funds, which also track European securities. If they’re being bought at midday UK time or European time, that’s before the US are even in the office. So there’s a number of different nuances with the regulation. I think that is going to be a lot of back and forth prior to that February 2021 date, but it is something that the clients need to be aware. It is something that us, as an industry, are spending a lot of time trying to figure out. But at the same time, anything that streamlines that ETF settlement process is going to be good for the end investors.
Deborah Fuhr Thank you so much for sharing your insights, Jim.
Jim Goldie No worries. Thank you, guys. I appreciate it.
Dan Barnes I’d like to thank Deborah and Jim for his insights, and of course, you for watching. To catch up on our other shows go to ETFTV.NET and TRADERTV.NET.