The tide is starting to shift at a rapid pace in Europe.

After years of looking over to our American cousins at the seismic move from mutual funds to ETFs, it has taken one of the worst financial years in recent memory to kickstart the same trend this side of the pond.

While demand for ETFs has always been strong in Europe – clocking in an average annual growth rate of 20% per annum since the Global Financial Crisis – there has also been strong appetite for mutual funds.

This is in stark contrast to the US where ETFs have seen $414bn inflows this year versus $798bn outflows for mutual funds, according to the Investment Company Institute, a decade-long trend that is only heading in one direction stateside.

However, this year, the story has been the same in Europe with exchange-traded product (ETP) flows outpacing mutual funds in every month so far in 2022, according to data from Bloomberg Intelligence.

Overall, ETPs have seen €62bn inflows so far this year, as at 15 November, while UCITS vehicles have seen €198bn outflows, as at the end of August, according to data from the European Fund and Asset Management Association (EFAMA).

“Market declines are opening up opportunities for investors to rotate out of mutual funds and into ETPs, which carry lower expense ratios,” Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said.

The challenging market environment means investors have been forced to have a keen eye on costs which plays into the hands of ETFs in general.

This focus on lower costs has been a big factor within the ETF market as well with strategies priced at 0.20% or less seeing €22bn inflows while investors have pulled €28bn from more expensive products.

Despite the structural challenges such as platforms in the UK 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.

The structural efficiencies of the ETF wrapper versus the antiquated mutual fund – see both the UK property and Neil Woodford sagas – mean the direction of travel is only heading in one direction in Europe.

As always, BlackRock has dominated the flows this year alongside the sleeping giant of Europe, Vanguard. Whether the same players will be at the top in a decade’s time remains to be seen, however, there is no doubt ETFs will be in an even stronger position when this time comes.

Related articles