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Strong appetite for ETFs in Europe persists despite challenging markets: Cerulli Associates

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In common with the EFAMA announcement this morning, Cerulli Associates has found that ETFs have won out in a difficult year.

The firm writes that increasing specialisation of ETFs in Europe—by geography, industry sector, credit quality, and duration—continues to spur investor adoption even amid market turmoil.

Despite adverse market conditions, ETFs domiciled in Europe continued to gather net new money from European investors last year, whereas their active mutual funds peers registered a high level of outflows. ETFs gathered EUR77 billion (USD82 billion) in net inflows in 2022. In 2021, net inflows of EUR159 billion were recorded.

Over the past five years, the European ETF market has evolved significantly. Asset managers and ETF issuers have allocated more resources to product development in a bid to provide specialised value propositions to investors, who have started to understand the benefits of the wrapper and the inclusion of ETFs in their portfolios.

“The ongoing innovation in the ETF field is giving local investors a diverse array of options in terms of asset classes and sectors. A growing number of managers are also entering the ETF space with highly specialised offerings in the smart-beta and active ETF domain,” says Fabrizio Zumbo, director, European asset and wealth management research. 

Thematic investing has grown increasingly popular in Europe, particularly during the coronavirus pandemic. Although thematic ETFs faced challenges last year due to a rotation away from growth and toward value and quality, Cerulli believes that appetite for thematic ETFs will grow across Europe, given that private clients are increasingly buying into the narratives behind products.

“Managers that can tell compelling stories will be well placed to succeed in this arena. ETF issuers need to work with clients and distributors to relay the message that megatrend-based investing is a long-term concept, with a five-to-10-year horizon. Clients want partners that can pitch a convincing narrative for why a particular theme is resistant to or can overcome any short-term noise,” says Zumbo. 

While active ESG products registered a high level of outflows in 2022, ESG ETFs continued to gather net inflows, albeit less strongly than previous years. According to 83 per cent of the ETF issuers Cerulli surveyed, incorporating ESG factors into their existing ETF ranges or launching new ESG ETF strategies is a high priority.

Looking ahead, 37 per cent of the ETF issuers across Europe are planning to focus on building new asset class capabilities and 34 per cent will be concentrating on creating partnerships with distributors. Nearly two-thirds (64 per cent) believe that partnering with distributors is a very important factor when it comes to increasing fund sales. 

Overall, despite 2022’s challenging environment, the prospects for ETF assets across Europe over the next two years remain positive, Cerulli research indicates. Some 45 per cent of the asset managers in Switzerland and Italy expect fast growth (greater than 10 per cent). Although only 10 per cent of respondents in France and 12 per cent in the UK expect fast growth of ETF assets, 68 per cent in the UK expect moderate growth (6 per cent to 10 per cent) in the country over the same period. Half of the respondents in France expect slow growth (1 per cent to 5 per cent) in the next 12 to 24 months. 

“Since the launch of the first ETFs in Europe more than 20 years ago, the market has evolved significantly and ETFs could represent the next phase in the evolution of asset management,” says Zumbo. “Private banks and wealth managers have traditionally used ETFs for satellite allocations or tactical positioning. However, the scenario is changing and innovation in the ETF domain is widening product availability. Direct-to-consumer platforms have been another catalyst of ETF adoption in certain countries in Europe.”   

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