Demand for Exchange-Traded Funds is Broadening

Equity exchange-traded funds (ETFs) will continue to account for the bulk of European ETF assets, but demand for other asset classes of ETFs is growing, according to the latest The Cerulli Edge—Global Edition.

Cerulli Associates, a global research and consulting firm, expects demand for ETFs overall in Europe to keep growing. Among the drivers of this growth are the increasing appeal of using ETFs for portfolio diversification, their cost-effectiveness, and their versatility in time-specific or niche exposures. Another key factor is the demand from institutional investors. The assets of ETFs domiciled in Europe rose at a compound annual growth rate of 16% from 2012 to 2018, despite contracting last year when several European equity markets moved into negative territory.

Cerulli says that European private banks and wealth managers are increasingly making use of ETFs and smart beta products, while a growing number of active managers are unveiling ETF propositions. Some 38.9% of the European asset managers that Cerulli surveyed expect smart beta products to grow rapidly in the institutional space; a further 44.4% anticipate moderate growth.

“ETF issuers are offering more innovative and niche products, and financial advisors are seeking to fully capitalize on ETFs’ wrapper potential,” says Fabrizio Zumbo, associate director, European asset management research. “We expect demand for ETFs from advisors to rise in tandem with the increasing adoption of ETFs as building blocks for portfolio construction. Direct-to-consumer platforms and robo-advisors are also set to boost demand for ETFs among retail clients.”

Competition within European ETF markets has intensified. The arrival of new players is spurring incumbents to broaden their product ranges. “Nowadays, a standardized value proposition may no longer be enough to attract flows. ETF issuers need to consider specialized and diversified offerings that include environmental, social, and governance (ESG); thematic; and smart beta products to differentiate themselves,” says Zumbo.

Demand for other asset classes of ETFs is on the rise. In the first quarter of 2019, fixed-income ETFs registered record inflows, and net flows for fixed-income ETFs in Europe reached €18.5 billion (US$20.2 billion) during that period, the largest ever quarterly total for the products. In addition, inflows to bond ETFs represented twice the volume of those to equity ETFs.

“Bond ETFs continue to gain traction. Our comparison of European equity and bond ETF assets from the beginning of 2017 to the middle of this year confirms that bond ETF assets grew strongly in the first half of 2019, from €162.5 billion to €200.7 billion. This was on the back of a more than 7% increase in bond ETF assets during 2018,” notes Zumbo. Data on net new flows underlines the extent to which bond ETFs have gained favor compared with their equity counterparts. Equity ETF inflows accounted for just under 72% of total inflows in 2017 and 68% in 2018. In the first half of this year bond ETFs accounted for more than 91% of net new flows.


•             Yield-hungry insurers in Taiwan are turning to ETFs to gain exposure in foreign investments following a regulatory change. Investments in onshore bond ETFs are not included in the calculation of the limit on insurers’ foreign investments, notes Cerulli. Taiwan overtook Korea as the fastest-growing ETF market in Asia in the first half of 2019.

•             In the U.S., advisors and investors are becoming increasingly aware of the alpha-providing potential of active ETFs, presenting an opportunity for active managers to enter this space, says Cerulli. Its research shows that most ETF issuers are planning to launch active or strategic beta products in the next 12 months, with 78% of issuers currently developing or planning to develop active ETFs.