ETF demand surges and cash appetite grows amid Iran conflict
Demand for ETFs has surged in the first quarter of the financial year as investors look to further diversify their portfolios to avoid market concentration and the fallout of the Iran war, with some increasing their cash holdings.
The average exchange traded-funds (ETFs) holding has doubled in the past five years, increasing from six per cent to 12 per cent, according to the latest investment index from Interactive Investor.
The product has grown in popularity in the last few years, as investors continue to be lured in by low costs, wider trade flexibility and broader diversification.
Kyle Caldwell, funds and investment education editor at Interactive Investor said: “One factor at play has been the strong performance of global stock markets over the past five and 10 years, which has led some investors to seek out global exchange-traded funds ETFs, which provide the return of the market for a low fee.
“While active funds offer the prospect of outperformance, this isn’t guaranteed. Given how buoyant stock markets have been over those time periods, some investors have been happy to accept the market average return.”
In particular, 35 to 44 year olds have beefed up their ETF holdings, with allocations standing at 23 per cent, up one percentage point the prior quarter.
This comes as investors also lose interest in investment trusts, with overall allocations dropping to 15 per cent, with 35 to 44 year olds only having an eight per cent allocation to trusts.
Cash creeping in
The ongoing conflict in the Middle East also caused investors to rush back to the safety of cash, with global stock markets and safe haven assets, including gold, seeing an influx of sell-offs as investors bowed out to make up for losses.
Cash holdings increased from 8.6 per cent at the end of last year to 9.2 per cent, but Caldwell warned that holding a high proportion can “come at the cost of stunting-long term growth”.
He said: “During times of stock market turbulence, it is worth remembering that volatility is part of the deal when investing in equities.
It is the price investors pay for the fact that, over the long run, putting money into shares rather than leaving it in cash yields greater rewards.”
Similarly, there was an uptick in money market fund holdings, amid the Iran conflict forcing the Bank of England to hold interest rates at 3.75 per cent.
Analysts do not see the rate being lowered in the “foreseeable future” as the conflict keeps energy costs spiking and runs the risk of higher inflation.
Equities in favour
Despite market volatility caused by the conflict and wider economic repercussions, both men and women kept equities as their largest portfolio holding.
Men allocated 32.2 per cent and women 29.8 per cent, with holdings in funds a close second.
But both had a near 10 per cent allocation to cash, reflecting volatility concerns.
Camilla Esmund, senior manager at Interactive Investor, noted that customer’s portfolio “is remarkably alike”, adding that women are becoming increasingly confident in their investment abilities.
She said: “The way men and women investment is far more similar than different.
“Their portfolios have delivered strong growth, broadly in line with those of male customers.
“Women are investing successfully, and there is a real opportunity to build on that confidence…and help more women stay invested in the long term.”