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European ETF market forecast to grow 15% annually over next five years, reaching USD4.5trn by 2030: EY

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The European ETF market achieved a record 28 per cent growth – reaching over USD1.8 trillion assets under management (AUM) – in 2023, according to EY’s latest research, as strong market performance and buoyant investor preference fuelled significant growth in the asset class. This growth is expected to continue at 15 per cent annually for the next five years and reach over USD4.5 trillion AUM by 2030, the firm says.

The research – which models growth, analyses performance, and incorporates the views of issuers managing more than 60 per cent of the European ETF market – found that active funds particularly will drive ETF AUM across the region from this year, and that managers across the board are focused on increasing retail participation, progressing ESG activity and unlocking the opportunities of AI and digital assets.

Lisa Kealy, EMEIA ETF Leader at EY, says: “The European ETF industry had a stellar year in 2023, reaching a record new high of USD1.8 trillion in AUM. As the sector further matures and investor interest deepens, we expect growth to continue over the next five years.

“To fuel this growth, we expect increasing numbers of new providers to enter the market and capitalise on active ETF flows, and for an uptick in retail investment in the sector. Investment in, and integration of, new tech will be crucial for all providers as they look to attract investors and meet their ever-changing and growing needs.”

Ireland to increase its ETF market share

More than 70 per cent of European ETFs were domiciled in Ireland in 2023, and this is expected to rise in the short-term, with AUM forecast to exceed USD3 trillion by 2030. Europe’s second largest ETF market is Luxembourg, with 29 per cent market share currently.

Lisa Kealy continues: “Ireland continues to operate as the location of choice for ETFs, and we expect to see steady growth over the next five years. This is in large part down to the country’s mature financial services sector, its skilled talent pool and the gold standard regulatory environment.”

AI-powered ETFs expected to develop over 2024

Artificial intelligence (AI) is reshaping the asset management industry, and managers are increasingly investing in the new technologies to improve investment decision-making, the firm says. AI is principally being used to conduct big data analysis, identify and predict patterns and trends, and run investment research. For ETFs, AI can also be used to identify and react to market events, which is particularly powerful for index-tracking.

A maturing approach to ESG

Inflows into ESG ETFs dropped globally in 2023, in favour of asset classes deemed to be safer in a challenging economy, such as large cap equities, government bonds or short duration debt. However, despite current investor caution, ESG-focused ETFs are expected to remain a long-term investment theme, especially in Europe, which leads the global market and accounted for a quarter of all ESG ETF flows in 2023.

At the end of 2023, USD345 billion had been invested into European ESG ETFs. While this is not insignificant, it represents less than 5 per cent of the global market and only 19 per cent of the European market, illustrating the potential for growth, the firm says.

Digital assets gain momentum

Digital assets continue to gain traction across Europe, boosted by the approval from the US SEC for bitcoin ETFs in January 2024. Across Europe, digital assets represent USD13 billion of ETPs, with wider adoption expected going forward.

Hermin Hologan, EMEIA Wealth & Asset Management Leader at EY, comments: “Growth in the current environment is no easy feat, and the industry’s focus on digital innovation to transform distribution channels and modernise how they operate will serve it well. Progress and innovation in digital assets particularly should go some way to helping ETF providers achieve greater profitability.

“On the sustainability side, ETF managers need to keep a sharp focus on both passive and active funds, ensuring they are keeping up with investor demands and clearly communicating activity. Investors’ appetite for more sustainable products and services is on the up, and the most savvy firms are those increasingly incorporating all elements of E, S, G into their businesses.”

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