Market volatility is driving even greater investor focus on costs and demand for cheap passive ETFs this year, a sign the wrapper is becoming even more widely accepted across the continent.

According to data from Bloomberg Intelligence, ETFs listed in Europe have seen €61bn inflows so far this year versus over €200bn outflows for mutual funds, as at 19 October.

In particular, the bear market has spurred a shift towards ETFs with low fees as investors use the volatility to rotate out of active mutual funds and into broad-based market-cap-weighted ETFs.

Highlighting this, ETFs with fees of 0.20% or less have captured €22bn inflows over the past six months while investors have withdrawn €28bn from the remaining ETF market, Bloomberg Intelligence data showed.

“Europe's ETFs have outpaced mutual funds in flows every month this year, and tougher market conditions appear likely to accelerate passive adoption across the region,” Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said.

Some of the most popular ETFs this year have included the iShares Core MSCI World UCITS ETF (IWDA), the iShares Core S&P 500 UCITS ETF (CSPX) and the Xtrackers DAX UCITS ETF (DBXD) which have seen inflows of $4.9bn, $4.2bn and $3.6bn, respectively, according to ETFLogic.

Meanwhile, fixed income ETFs – the majority of which offer simple government or corporate bond exposure – have been in high demand capturing a further €8.1bn inflows in Q3, according to Morningstar.

Edward Glyn, head of global markets at Calastone, said the growing divergence in appetite for active and passive funds is a “clear, structural step-change” in investor behaviour.

“Investors are cementing passive funds into their regular savings plans and trading them far less frequently than their active holdings,” Glyn added.

At the forefront of this year’s trend is Vanguard which saw the largest inflows across all ETF issuers in Europe in Q3, knocking the ever-present BlackRock off its perch in the quarterly rankings.

This is the second quarter in a row Vanguard has seen positive flows (€2bn) despite the choppy market environment, highlighting how investors are using the volatility to rotate into cheap broad-based ETFs.

“The Vanguard effect is spreading to Europe. Flows into ETFs have surpassed those of mutual funds every month this year as Vanguard's growth pressures industry fees,” Psarofagis 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.”

While the ETF market has developed rapidly in recent years and seen tremendous innovation, the power of ETFs that offer exposure to traditional benchmarks such as the S&P 500 or MSCI World cannot be underestimated.

As Jack Bogle said: “Do not look for the needle in the haystack. Just buy the haystack!”

It appears investors are heeding the late Vanguard founder’s advice despite the traditional view that active managers should outperform when there is volatility in the market.

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