Goldman: ETF Demand Will Hit a Record $400 Billion in 2018

ETF demand will reach a record high of $400 billion in 2018 according to Goldman Sachs.

The bank lays out this forecast in its Flow of Funds: Outlook for US equity demand in 2018 report, which was published earlier this week. The report, a copy of which has been reviewed by ValueWalk, predicts that flows into ETFs will hit a total of $400 billion during 2018, a record for the sector. The bank estimates a total of $300 billion will flow into exchange-traded funds for 2017.

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ETF assets as a share of the total corporate equity market (public and private) have doubled since 2009 and now stand at a record high (6% of total). ETF AUM, including index objective funds, is equal to 14% of S&P 500 market cap and 9% of the overall US public equity market.

As ETF demand continues and inflows increase, Goldman expects the active-to-passive rotation to pick up.

ETF Demand Leads to Active Outflows

Thanks to investor outflows, according to the bank's report, mutual funds will be net sellers of equities in 2017 to the tune of 0 billion. Selling in 2018 is projected to hit 5 billion. Data shows mutual funds have sold equities for seven consecutive quarters since the end of 2015.

"Equity mutual fund outflows ( billion YTD), coupled with a declining liquid asset ratio, have been key drivers of negative equity demand among active funds during the past two years. We reduce our 2017 estimate of mutual fund equity demand to -0 billion from - billion given greater-than-expected net selling during the first half of the year. The combination of passive fund popularity and weak active fund returns will continue to hurt mutual fund equity demand in 2018."

Pension funds are also expected to join in the sell. Goldman's forecasts call for pension funds to sell 0 billion and 0 billion of equities in 2017 and 2018, respectively. The analysts believe pension funds will continue selling stakes in 2018 as the "10-year Treasury yield rises by 100 bp to 3.3%." Since 2012, net selling of equities by pension funds has averaged 0 billion annually.

On the other side of the trade, corporations are projected to repurchase 0 billion of equities next year. As Goldman explains:

"We forecast corporations will purchase 0 billion (-9%) of US equities in 2017 and 0 billion (+3%) in 2018 primarily through share buybacks (net of issuance)...Net buybacks should rise by 3% in 2018 given an increase in repurchase authorizations including and excluding Financials, high cash balances, and solid earnings growth. However, extended valuation should limit substantial buyback growth. Rising interest rates and the underperformance of stocks focused on buybacks could pose additional headwinds to total corporate equity purchases."

By Rupert Hargreaves

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