The European ETF market recently suffered its first outflows since the COVID-19 crash, however, with trading activity at “abnormally” high levels, there are signs investors are becoming more tactical with their ETF allocations this side of the pond.

According to data from ETFGI, exchange-traded products (ETPs) in Europe saw $522m outflows in June, the first time the market has seen monthly outflows since March 2020 when coronavirus sent shockwaves through the global economy.

This was compounded when investors withdrew a further €3.7bn from European-listed ETPs in July, according to data from Bloomberg Intelligence, putting the market a long way behind the record pace set last year.

Furthermore, the market share of ETFs in Europe significantly lags other continents such as the US and Asia, despite record inflows seen in recent years, as the industry continues to grapple with barriers to adoption such as embedded retrocession fee models and the lack of a consolidated tape.

However, these consecutive months of outflows are not a sign of diminishing demand for ETFs but simply a reflection of current market conditions.

The commodity ETP segment of the market suffered in particular as investors looked to take profits on the significant outperformance seen over the past year.

Highlighting this, commodity ETPs saw €5.3bn outflows in July, the most across all asset classes, while equity ETPs suffered €2.4bn net redemptions.

The rotation to fixed income ETFs, which saw €4.1bn inflows, shows investors have been far more tactical with their ETF asset allocations recently and are more than aware of the potential risks in the market while also taking advantage of rising yields in investment-grade corporate bonds.

“Though on the surface that may seem to paint a dismal picture of investor interest, there are encouraging signs of more tactical use of ETPs through asset class rotations, shifts into ESG funds and a spike in trading levels,” Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said.

The spike in trading levels, especially during the summer months, is certainly noteworthy as it shows investors are using the wrapper as a risk management and tactical allocation tool.

ETP trading hit €227bn in turnover in July which Psarofagis described as an “abnormally high reading for summer months”, a time when trading usually drops off.

“The increase in trading metrics with flows slightly negative suggests that investors are altering their exposures within ETFs and using them in a more tactical manner,” he added.

It is worth noting demand for mutual funds has also experienced a significant slowdown with fixed income funds seeing €2.3bn outflows in July, according to Morningstar, highlighting how it is not just the ETF wrapper but general market nerves that is hampering demand.

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.

Related articles