ETFs are on course to post another yearly growth rate of above 20% as the wrapper shows no sign of slowing down.
According to data from Morningstar, European-listed ETFs saw $34bn inflows in Q3 adding to the $40bn positive net flows in the previous quarter taking overall assets under management (AUM) to $1.1trn.
PwC data shows ETFs in Europe have grown at a compound annual growth rate (CAGR) of 20.5% between 2008 and June 2020, almost triple the growth rate of broader UCITS assets.
While it is clear ETF assets will continue to grow as more and more investors realise the benefits of ETFs in a multi-asset portfolio, there will be certain winners and losers over the next five years.
Last year, Morningstar forecasted European ETFs to hit €2trn by 2024 amid regulatory tailwinds, further innovation and increasing understanding of the benefits ETFs can bring.
As Salim Ramji, global head of iShares at BlackRock, said: “ETFs have been disrupting asset management for over two decades but we are still in the early stages of the transformation.
“The next phase of acceleration is primarily driven by the recalibration of what it means to be an active investor.
“The performance of ETFs through the latest market stress test illuminated the trust that investors place in ETFs to manage risk, seek price discovery and hedge portfolios and risk – and the trends we have historically seen in the US market, are now playing out in Europe as we reach critical mass.”
There are two areas, in particular, where ETFs are set to explode over the next five years, fixed income and ESG.
BlackRock has predicted around 40% of new ETF assets will be in fixed income in the next five years while a quarter will be in ESG strategies.
The huge inflows into both these areas has been well documented and as a result, ETF issuers have been launching strategies at a rapid rate over the past 18 months in order to capture these trends.
However, an area that is yet to take off in Europe is combining ESG and fixed income from both an assets and product development point of view.
While there are signs this segment of the market is slowly starting to take off such as the largest ETF, the iShares € Corp Bond ESG UCITS ETF (SUOE), nearly hitting the $2bn AUM mark, the ETF issuer that is able to launch innovative solutions will reap the rewards, especially when one considers the lack sovereign ETFs with an ESG tilt.
As Jose-Garcia Zarate, associate director, passive strategies research, at Morningstar, said: “The conditions are therefore ripe for expansion of the ESG passive-bond-fund offering in Europe – especially considering that fixed income has been identified as one of the key areas of growth in the coming decade by ETF providers.”