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January European fixed income ETF inflows show a shift in vehicle preference: Bloomberg Intelligence

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A record January for European fixed income ETF inflows is the latest indicator of the secular shift in vehicle preference, capping three years of taking in more money than mutual funds, writes Athanasios Psarofagis, ETF Analyst at Bloomberg Intelligence.

“We believe growth in product options and trading could fuel the highest inflows yet for the region’s bond ETFs in 2023,” he writes.

Europe-listed fixed-income ETFs took in EUR9.5 billion in January, a record for the month. ETFs focused on the region’s bonds added a record EUR5 billion. The fixed-income trade is back in vogue globally, with the US ETF market also seeing its strongest flows to start any year, Psarofagis writes. “We expect bond-ETF flows to maintain strength through 2023.  Outflows from bond mutual funds have opened up an opportunity for bond ETFs, which since the start of 2020 have taken in EUR104 billion, compared with only EUR42 billion for mutual funds. This marks a secular shift in vehicle dynamics, with fixed-income ETFs now holding a steady lead over mutual funds. Many of those redemptions may be deployed via the ETF wrapper, fuelling faster growth.”

The preference for active management remains stronger in fixed income, the team at Bloomberg Intelligence says. Passive accounts for 35 per cent of the asset class in the US funds market and only 18 per cent in Europe. Yet fixed-income products have a bigger share of the ETF market in Europe, holding 24 per cent of all ETF assets, compared with 19 per cent in the US. 

Wider trading adoption could serve as a precursor for bond-ETF flows, the team says. On average, fixed-income funds represent roughly 25 per cent of all ETF trading in Europe, but that share reached as high as 31 per cent in recent months. Increased trading activity, coupled with mutual fund outflows that may be looking to come back into the market, could support growth. Trading remains heavily on the institutional side, with over 56 per cent done via multilateral trading facilities (MTFs).

Fragmentation in Europe’s market can bolster the case for using ETFs, which are inherently more centralised, Psarofagis says. 

Over the past 10 years, the European fixed-income ETF count has jumped more than 180 per cent to about 460 strategies. This is a key metric, with the widening of choices for investors helping to fuel growth of the ETF wrapper, Psarofagis says.

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