2016: A year of firstsJanuary 2017

2016: A year of firstsEuropean ETF Market Flows

This document is for the exclusive use of investors acting on their own account and categorised either as “eligible counterparties” or “professional clients” within the meaning of markets in financial instruments directive 2004/39/ce

3

Global ETF flows broke new records in 2015, and investors began 2016 with great expectations. Monetary policy divergence between the Fed and the rest of the world was again set to be the key theme, with flows expected to accelerate in areas where policy remained accommodative and economic conditions were improving.

In the end, the year proved far more challenging as the political landscape changed beyond recognition. The investment industry too underwent seismic, potentially permanent, change. The scales may have been tipped for good.

For the first time ever, European ETFs gathered more flows than active funds (among equities, bonds and commodities), as investors recognised their ability to offer solutions to longer-term, strategic, asset allocation needs as well as to exploit or protect against short-term market moves. These days, they offer far more than market access.

It’s no wonder “ETF” was named as one of the 12 words that most defined 2016 by the FT in London. We wouldn’t bet against a repeat this year.

All the best with your investments in 2017

Marlène Hassine Konqui, Head of ETF Research

2016: A year of firsts

Welcome

2016: A year of firsts

What went on in the global ETF market 4

Were there any surprises? 5

What were the key trends? 6

How did flows compare with active funds? 8

What’s next? 9

Summary*

► In Europe, Net New Assets were 43% lower than in 2015 at EUR41bn. Total AUM climbed 14% to

EUR 516bn

► More money flowed into fixed income ETFs than equities for the first time ever

► Surprises included huge outflows from European equity ETFs

► New trends included record inflows into Smart Beta and a switch into fixed income ETFs able to

counter a changing environment

► More money went into European ETFs than active funds

All data: Lyxor IAM, Bloomberg. Data from 31/12/2015 to 31/12/2016.

5

What went on in the ETF market?

Were there any surprises?

Global ETF market Assets under Management were close to 3300bn USD at the end of November 2016, a growth of 15% compared to the period of 2015. However, net new assets (NNA) were up 2% ($324bn) in directionless markets characterised by declining but checkered volatility and lower interest rates.

Global ETF market AUM reaches record high 2016 flows mainly came from fixed income ETFs with NNA already 34% above those of 2015 at EUR100bn. Equity flows were down 19% at USD170bn. Commodities flows increased significantly to USD 35bn, ten times higher than they were in 2015, as gold prices rebounded and oil prices stabilised.

Outflows were most marked in European equities (-USD40bn) as uncertainty weighed on sentiment. Negative economic news prompted sizeable outflows from Asia too (49% decrease of flows). The US and Emerging Markets were the big winners, representing 85% and 12% of equity flows respectively.

All fixed income segments were positive, except government bonds, with the highest increases seen in the Inflation-Linked and Emerging Markets debt sectors as the low rate environment fuelled the hunt for yield.*

*Source: ETFGI, November 2016.

Were the same trends apparent in Europe?Broadly, yes. Net New Assets were EUR41bn, 43% below where they were in 2015. Fixed income ETF flows were above those of equities for the first time ever. Equity flows did however accelerate towards the end of the year, and ended in positive territory. At 16EUR bn, they represented 39% of total inflows.

Flows remained negative on European equity ETFs at EUR7bn but US equities continued to be in favour at EUR12bn. The other winner in the equity markets were Emerging Market ETFs, which enjoyed inflows of EUR4bn as the Fed remained on hold for much of the year.

In fixed income, corporate bonds held the most interest. They gathered 62% of overall fixed income flows (EUR14bn), supported by the ECB’s easing monetary policy. Developed market government bond ETFs had outflows of EUR 3bn, in sharp contrast to inflows of, on average, EUR6bn over the previous three years. Commodity ETF flows revived (EUR3bn) to reach a three-year high on the oil price rebound.

2016: A year of firsts

European ETF Market NNA 40,755

Total Equities 15,933

Developed Market Equities 9,575

o/w US Equities 11,672

o/w Asia Pacific Equities -2,554o/w Europe Equities -6,919

o/w World Equities 6,574Emerging Market Equities 4,356

Global Equities 2,002Total Fixed Income 22,406

Developed Market Govies -3,021o/w Europe Govies -3,207

o/w US Govies 26Emerging Markets Govies 4,847

Corporate Bonds 13,885High Yield 2,788

Inflation Linked 3,279Money Market -510Commodities 2,6122013 2014 2015 2016

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

80,000

NovOctSepAugJulJunMayAprMarFebJan Dec

Source: Lyxor IAM, Bloomberg data from 31/12/2012 to 31/12/2016. Past performance is not a reliable indicator of future results.

Source: Lyxor IAM, Bloomberg data from 31/12/2015 to 31/12/2016. Past performance is not a reliable indicator of future results.

Cumulated European ETF net new assets since 2013 (EURm) 2016 European net new assets by asset class (EURm)

1. Huge outflows from European Equity ETFsAfter record inflows in 2015, European equity ETFs experienced record outflows in a chaotic volatility environment in which the VSTOXX index often climbed above 30%. Political uncertainty was most likely to blame amid the rise of populism. Yet Trump’s victory, possibly the biggest surprise of all, coincided with a trend reversal and positive flows over Q4 2016 of EUR5bn.

2. Strong inflows into US Equity ETFsFlows into US equities were sustained throughout the year, at EUR12bn. Until July, they were split between traditional and Smart Beta minimum volatility ETFs (EUR2bn and EUR2bn respectively) because of uncertainty over where the Fed’s monetary policy might go next and global political uncertainty.

From August onwards, inflows turned back to traditional ETFs vs Smart Beta minimum volatility ETFs as the economic outlook improved. Flows then accelerated after Trump’s victory ahead of his expected fiscal push (EUR8bn inflows and EUR1bn outflows respectively).

3. A strong reversal back into Emerging Markets ETFs

Contrary to early expectations, the Fed remained on hold for most of the year while yield remained scarce after years of accommodative policy. As a result, we saw a strong reversal back into Emerging Markets equities and bonds (EUR9bn).

Flows were mainly concentrated on broad indices like the MSCI Emerging Markets index, because investors were wary of taking on specific local exposures given the policy uncertainty. This was confirmed by the outflows of EUR1bn we saw over the fourth quarter as soon as the Fed became more hawkish.

4. Corporate bond ETFs gathered nearly half of all inflows

Inflows of EUR17bn for corporate bonds represented 41% of total NNA. Investment-grade corporate bonds reached a three-year high, up 50% vs. 2015 at EUR14bn, after the ECB included corporate bonds in its quantitative easing bond buying programme.

All data on this page is sourced from Lyxor IAM & Bloomberg. Data from 31/12/2015 to 31/12/206. Past performance is not a guide to future returns.

2015

2015

€38bn

€2bn

€2bn

-€7bn

€12bn

€9bn

€14bn

2015

2013

2016

2016

2016

2016

3-yr record

high

7

2013 2014 2015 2016

1,200

600

800

1,000

200

400

0

1,400

NovOctSepAugJulJunMayAprMarFebJan Dec

1. Smart Beta: A greater role in portfolios

2016 was a groundbreaking year for Smart Beta funds. Investors recognised their effectiveness as long-term risk reducers, portfolio diversifiers and income generators; as well as shorter-term return seekers via factors. . EUR7bn of Net New Assets in total* were split between factors (EUR4bn in NNA), mostly obviously Value (EUR2bn) and multi-factor ETFs

What were the key trends?

2013 2014 2015 2016

6,000

4,000

2,000

0

8,000

NovOctSepAugJulJunMayAprMarFebJan Dec

2013

6,0008,000

4,0002,000

0-2,000

12,00010,000

14,000

201620152014All Corporate Bond ex Short Term ETFsShort Term Corporate Bond ETFs

*Source: Lyxor IAM, Bloomberg data from 31/12/2012 to 31/12/2016. Past performance is not a reliable indicator of future results.

*All data in this section sourced Lyxor IAM, Bloomberg. Data from 31/12/2012 to 31/12/2016. Past performance is no guide to future returns.

All data in this section sourced: Lyxor IAM, Bloomberg. Data from 31/12/2012 to 31/12/2016. Past performance is not a reliable indicator of future results.

All data in this section sourced: Lyxor IAM, Bloomberg. Data from 31/12/2012 to 31/12/2016. Past performance is not a reliable indicator of future results.

**Source: Lyxor IAM, Bloomberg. Data from 31/12/2015 to 31/12/2016. Past performance is not a reliable indicator of future results.

***Source: Lyxor IAM, Bloomberg data from 31/12/2015 to 31/12/2016, Value ETFs include style and factor ETFs. Past performance is not a reliable indicator of future results.

European Smart Beta ETF cumulated net new assets (EURm)*

Investment grade corporate bond ETF flows breakdown by maturity (EURm)

Inflation linked ETF monthly net new assets (EURm)

Short bond strategy ETF monthly net new assets (EURm)

Breaking down the flows into European Smart Beta ETFs

Smart Beta minimum volatility vs. value ETF flows (EURm)***

(EUR900m). Investors also favoured fundamental strategies (EUR2bn) mainly dividend generation ETFs, and Min Vol strategies (EUR1bn)**.

We’ve seen a great rotation away from defensive strategies since September. Pro-cyclical strategies like Value have benefited from expectations for a rebound in growth and much greater fiscal spending.

2. Fixed Income: countering a changing rate environmenta. Inflation protection

Whether traditional inflation-linked bond ETFs, or more innovative products that offer protection against increases in inflation expectations, interest was high this year. EUR 3bn of Net New Assets was nearly twice what we saw in 2015.

ETFs on US inflation represented 74% of total flows, as inflation fears were higher in the US in 2016. Flows on inflation expectation ETFs launched in May already represent 18% of the total on both US and European ETFs.

3. The hunt for yield evolves*The low rate environment continued to fuel the hunt for yield. Equity Dividend, high yield and Emerging Market debt ETF flows totaled EUR12bn, nearly 30% of total European ETF Market NNA, in 2016.

Emerging Market bonds captured 41% of those inflows, having benefited from the combination of their attractive yield and the Fed’s dovish approach to policy for much of the year. High yield bond ETFs were a distant second, with 23%.

Meanwhile, dividend products gathered EUR3bn of flows, 75% of which came from Smart Beta income-generating ETFs given their ability to pinpoint sustainable dividend payers. The Fed’s late change of tone did see some of the flows reverse out of emerging debt and did limit flows into other ETFs in the category.

c. Short-dated assets

Fears rates could rise fuelled flows into short bond ETFs as we’ve seen, but short-dated bonds were also popular. Short-dated investment-grade corporate bond ETFs also enjoyed inflows of EUR7bn, up 73% from 2015.

410-541

-749209

-1368

114

5250

583121

-30-19-18

50525

Total Risk BasedMin Vol/Min VarEqual Weighted

ERCTotal Fundamental

Income GenerationOther Micro Weighted

Macro WeightedTotal Factor Allocation

Multi FactorLow Vol/Low Beta

MomentumQuality

Value

European Smart Beta ETF

Size

Jan-16

0200

-200-400-600-800

400600800

1,000

Nov-16Sep-16Jul-16May-16Mar-16

Min Vol/Min Var Value

b. Interest rate hedging

Short and leveraged products can be used to hedge against interest rate moves. These are mainly European products on German, Italian and UK government bonds. Most of the flows in 2016 were on short bund and short BTP ETFs as interest rate trends underwent a sharp reversal in Q3 2016. Total NNA of nearly EUR1bn almost doubled that of 2015.

2013 2014 2015 2016

2,0002,5003,000

5001,0001,500

5000

-1,000

3,500

NovOctSepAugJulJunMayAprMarFebJan Dec

2016: A year of firsts

Equity Dividend

Emerging Market Debt

High Yield

30% of all flows went in

search of higher yield

*All data in this section sourced Lyxor IAM, Bloomberg. Data from 31/12/2015 to 31/12/2016. Past performance is no guide to future returns.

9

We saw a first for the industry this year - flows into European domiciled active funds (in equity, fixed income and commodity) were below those of European ETFs for the first time ever. In fact, they were just under half. This can mainly be explained by outflows amounting to a massive EUR76bn from active equity funds. In contrast, equity ETFs recorded inflows of EUR12bn (as of end of November 2016).In fact, ETFs are now more firmly established as investment tools than ever before, opening new frontiers for active asset allocation. In Europe, AUM has crossed the EUR500Bn threshold for the first time (up 16% vs. 2015), driven by their attractive relative performance versus traditional active managers and the growing recognition of the liquidity, transparency and cost benefits they bring to portfolios. Many of the securities now readily available through ETFs would once have been inaccessible or extremely expensive to get hold of. Little wonder commentators believe they are “revolutionising the business of long-term saving”.

And the growth isn’t just in traditional areas. ETF providers are more able to adapt to challenging markets as the growth of Smart Beta has shown. Meanwhile fixed income ETFs gathered more assets than equity ETFs for the first time given their greater flexibility in the hunt for yield and the industry’s ability to reinvent itself to deliver solutions for rising inflation, rising rates and so on.

For our guide to what’s next, read our 2017 outlook and our Q&A with Arnaud Llinas

How did flows compare with active funds?

What’s next?

2013 201620152014

Active Fund Flows ETF Flows

50,000

100,000

0

200,000

150,000

250,000

2013

ActiveFunds ETF

ActiveFunds ETF

ActiveFunds ETF

ActiveFunds ETF

201620152014

Commodities Equity Fixed Income

50,000

100,000

-100,000

0

-50,000

200,000

150,000

250,000

*Source: Lyxor ETF, Morningstar data as of 30/11/2016 based on Fixed income , Equity & commodities data

Source: Lyxor ETF, Morningstar data as of 30/11/2016. Past performance is not a reliable indicator of future results.

European-domiciled active funds vs. ETF flows (EURm) European-domiciled active funds vs. ETF flows breakdown by asset class (EURm)

2016: A year of firsts

Active equity

Equity ETFs

€76bn

€12bn2017: Press on, but watch your stepJanuary 2017

Press on, but watch your step2017 outlook from Lyxor ETF

This document is for the exclusive use of investors acting on their own account and categorised either as “eligible counterparties” or “professional clients” within the meaning of markets in financial instruments directive 2004/39/ce

Q&A with Arnaud Lllinas January 2017

View from the topA Q&A with Arnaud Llinas, Head of ETFs & Indexing

This document is for the exclusive use of investors acting on their own account and categorised either as “eligible counterparties” or “professional clients” within the meaning of markets in financial instruments directive 2004/39/ce

The scales may have been tipped for good*

11

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2016: A year of firsts

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