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Bloomberg Intelligence comments on European ETF growth over mutual funds during recent volatile markets

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Bloomberg Intelligence analysts Athanasios Psarofagis and Henry Jim have written a note commenting on ETF flows in Europe, against mutual fund flows, during recent challenging market conditions.

The pair writes that ETF flows have outpaced mutual fund flows every month this year and tougher market conditions appear likely to accelerate ETF and broader passive adoption across Europe.

July was the sixth straight month of outflow for UCITS mutual funds, reaching EUR161 billion or the year vs. ETFs’ EUR56 billion intake. The pair says that the bulk of this year’s EUR161 billion mutual fund outflows has been driven mostly by bond funds that have shed more than EUR122 billion since the start of 2022, while equity funds’ cumulative outflows have reached EUR12 billion.

Equity ETFs have taken in EUR39 billion, while bond ETFs have attracted EUR17 billion, a signal that ETF share tends to expand during volatile periods, the authors say.

“Passive investments’ share of European UCITS assets has nearly doubled to almost 20 per cent from 10 per cent in less than a decade, led by ETFs, and we believe more growth is likely, given cost pressure and active funds’ underperformance. Since most ETFs are passive, their inflows will increase share in the region but the growth of passive falls even outside the ETF wrapper, as passive index-tracking mutual funds have seen inflows of EUR16.2 billion euros this year.”

Since the start of of 2020, mutual funds have taken in EUR653 billion while ETFs about half that, with EUR338 billion euros.

“The main difference has been the slow and steady growth of ETFs, despite gyrations in the market. Mutual funds have seen a stronger impact by market performance and ETFs’ ability to take in new assets, even when the market is down, which will accelerate their share growth.”

European ETFs saw a rare third consecutive month of outflows in August, with the industry slightly in the negative by just EUR75 million. Over the trailing three months, the industry shed nearly EUR5.6 billion. The authors writes that the drop in flows leaves this year’s trajectory way off the pace of the prior-year record haul.

“Though the industry may not be seeing additional new inflows, there are signs of increased tactical ETF use by investors,” the pair writes. “Trading in July reached EUR202 billion of turnover, an abnormally high reading during summer months, which tend to be low. The increase in trading metrics with flows slightly negative suggests that investors are altering their exposures within ETFs.”

Though ETF flows have slowed this year, their ability to remain more resilient than their mutual fund counterparts will mean more pressure on funds’ costs, the authors say.

“We expect active funds in the region to lower their fees in response. The average asset-weighted cost of an active equity UCITS fund is 1.28 per cent, a figure that’s slowly declined as ETF flows have accelerated. Equity ETFs’ average weighted cost is 23 bps. Costs for active fixed income funds have also declined, to an average of 72 bps.”

The pair concludes with the note that Europe’s adoption has been relatively slow vs. other global markets. ETFs hold 7 per cent of regulated fund assets in Europe, the smallest share of any major region.

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