Latest research from Cerulli Associates reveals that European ETFs are likely to be among the major gainers in 2019 as institutions and retail investors continue to seek cost savings.
Cerulli Associates also predicts that ESG funds, both passive and active will grow in popularity next year.
The firm notes that the majority of European ETFs suffered slowdowns rather than outflows in 2018 and most held up well when markets turned sour in October.
“We believe that European ETFs may be about to enter a new phase in their evolution, demonstrating that they can be the vehicle of choice even when investors turn defensive,” says André Schnurrenberger (pictured), managing director, Europe at Cerulli.
He predicts that institutions that have used ETFs as core holdings for their strategies are unlikely to make dramatic changes in that regard. “Some may look at moving some of their satellite elements back into active funds, but they will have to overcome the scepticism resulting from a raft of statistics showing actives repeatedly failing to outperform their benchmarks.”
With ETF market competition fierce, some firms are opting to go into more niche products. “Some of their products are bound to fall by the wayside. Smart beta funds and those aimed at specific geographies, such as Asia ex-Japan and Eastern Europe, have been notable among the casualties,” says Schnurrenberger.
One obvious growth area, says Cerulli, is ETFs related to ESG. “More investors, especially institutions, are showing interest in ESG. But ESG means different things to different investors and many are continuing to demand customised versions,” says Schnurrenberger, adding that some providers may choose to set up their own indices to save costs and to address evolving demand.
The research also revealed that after three consecutive months of inflows, the global equity sector posted net outflows of EUR711 million (USD806 million) during October, largely driven by active funds. Year to date, the global equity sector has attracted EUR20.2 billion, significantly less than the EUR51.5 billion gathered during the first 10 months of 2017, the firm says.
Spain saw some heavy outflows in October, with bond funds among the most notable casualties. Yields on 10-year Spanish government bonds rose to an eight-month high of 1.82 per cent during the month, amid contagion worries originating from Italy. However, the yield had fallen to less than 1.5 per cent by early December. Equity fund flows held up better, despite Spain being hit by the Europe-wide sell-off in shares in October. The subsequent bounce may prompt more confidence among equity investors, says Cerulli.