This year has been a fantastic litmus test for the ETF wrapper following the collapse of the Russian stock market and the huge increase in market volatility amid rampant inflation and ongoing uncertainty.
Despite the challenges, demand for exchange-traded products (ETPs) listed in Europe has been remarkably strong. According to data from Bloomberg Intelligence, ETPs saw €62bn inflows in the first three quarters of the year while investors pulled €221bn from overall UCITS vehicles in Q2 and Q3 alone.
This highlights how the ETF wrapper is rapidly becoming the vehicle of choice for investors across Europe who are using the significant volatility in markets to rotate out of mutual funds and into ETFs.
Amid the tough year for market performance, there has been a significant focus on costs which has been a big factor in how investors have allocated over the past six months. Highlighting this, ETFs priced at 0.20% or less have seen €22bn inflows during this period while €28bn has been pulled from ETFs with a total expense ratio (TER) of 0.20% or more.
Benefitting from this shift to low-cost passive ETFs was Vanguard which saw the most inflows across all ETF issuers in Europe in Q3, knocking the ever-present BlackRock off its perch in the quarterly rankings.
The world’s largest asset manager also had another strong year with 57% of 2022’s inflows and over 40% of industry revenue and trading, as at 16 November.
Despite the structural challenges around UK platforms and retrocession fees across parts of mainland Europe, it appears investors in Europe are starting to realise the benefits of the ETF wrapper.
Not only do the majority of strategies offer exposure to different parts of the market in a rules-based transparent structure, but ETFs also can be traded intraday and have an extra layer of liquidity by trading on the secondary market.
Are bonds back?
In particular, investors have been more bullish about the prospects for certain areas of the bond market amid the sharp increase in yields over the past 12 months. Longer-duration US Treasury and corporate bond ETFs have been in vogue this year, especially given 10-year US Treasury yields spiked over 4% at points in 2022.
As Ben Seager-Scott, head of multi-asset funds at Evelyn Partners, said: “Bond prices could of course fall further if inflation keeps on rising into 2023, but we believe that while it will remain high, inflation will come off its peak.
“Shifting valuations, particularly in bond markets, have changed the risk/reward dynamics for investors. And this shift could demand nuanced alterations to investors’ asset allocation.”
At the other end of the spectrum, investors reversed the inflows seen into China government bond ETFs in the previous two years with the iShares China CNY Bond UCITS ETF (CNYB) and the iShares China CNY Govt Bond UCITS ETF (CCBI) suffering a combined $8.6bn outflows by 4 November, according to data from ETFLogic.
From a trading perspective, investors have been active with their use of ETFs highlighting how the wrapper is used as an efficient vehicle to gain access to different exposures. According to Bloomberg Intelligence, ETP trading in Europe exceeded €2.1trn by 16 November which beat 2021’s record with over a month left in the year.
Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said this shows investors are using the wrapper “more tactically” and as a liquidity vehicle to take advantage of market opportunities.
“Passive investments' share of European UCITS assets has nearly doubled to almost 20% from 10% in less than a decade, led by ETFs, and we believe more growth is likely, given cost pressure and active funds' underperformance,” he added.
“Though ETF flows have slowed this year, their ability to remain more resilient than their mutual-fund counterparts will continue to put downward pressure on costs.”