Continuing uncertainty over the UK’s departure from the European Union has spurred investor demand for exchange traded funds (ETFs) to limit the impact of extreme fluctuations in the value of sterling.

Data provider Thomson Reuters Lipper reports that net inflows into Europe-based ETFs hedged to sterling reached record levels in Q1 of 2019. The funds attracted almost €1.7 billion over the three months as investors sought protection against currency risks linked to a no-deal Brexit.

The inflows were around seven times the level of a year earlier, with sterling-hedged fund attracting no more than €256 million in Q1 2018.

The largest inflows were seen in February, when nearly €1.1 billion moved into ETDs hedged to the British pound. Invesco, UBS and Lyxor were among the asset managers gathering most of the new money into sterling-hedged ETFs during the just-ended quarter.

Detlef Glow, EMEA head of research at Lipper, said that increased demand for currency-hedged funds came during a strong sales period for the ETF industry generally. “An additional driver might be Brexit, as investors fear currency losses and are therefore hedging themselves against this risk,” he commented.

Lipper’s data shows that over Q1 2019 Europe’s ETF sector attracted almost €27 billion, with February alone accounting for around half that total.

US concerns

Andrew Walsh, head of passive and ETF specialist sales for the UK and Ireland at UBS Management told Financial News: “We have seen a few of our larger clients, and many other mid-sized clients, going into GBP-hedged in recent months, on the basis that sterling is undervalued at current levels, no matter what the eventual outcome on Brexit.”

Paul Syms, head of ETF fixed income product development for EMEA at Invesco, told the magazine that the asset manager had seen particularly strong demand for the GBP-hedged version of its US treasury bond 7-10-year ETF since it launched in January.

“There are various reasons for investors buying longer-dated US Treasuries, which would include – but are not limited to – concerns about an economic downturn in the US and easing of monetary policy,” he added.

“In addition, the UK is obviously facing the numerous risks around Brexit, which may cause sterling to be more volatile than in normal market conditions. For a sterling-based investor, the potential for sterling to rise or fall quite dramatically around the decision on if, when and how Brexit takes place -which has nothing to do with their economic view – may be a reason to hedge foreign currency-denominated assets.”