The European ETF market saw record quarterly inflows in the first three months of the year amid strong demand for equity, ESG and a return to value.

According to data from Morningstar, ETFs in Europe saw €48.2bn inflows in Q1 taking the ecosystem’s assets under management (AUM) to €1.2trn, up 10% from the end of the previous quarter.

Among these flows were a continuation of some of the trends witnessed in 2020. For instance, prevailing risk-on sentiment saw equity ETFs net close to 90% of total Q1 flows while seeing total assets rise by 15% quarter-on-quarter. 

Meanwhile, the momentum in sustainable investing saw environmental, social and governance (ESG) ETFs claim 54% of new assets. In fact, while US large-cap equity was among the top flow-gathering categories, many traditional S&P 500 ETFs languished which suggests a shift to ESG equivalents. 

Jose Garcia-Zarate, associate director, passive strategies research, at Morningstar, said: “The bulk of flows in this category were directed to ESG investments, so it is fair to conclude that some investors who previously had their money in the mainstream S&P 500 ETFs switched to the ESG versions.” 

Furthermore, despite a growth dip in March and fears of frothy valuations, thematic ETFs recorded their best quarter on record. Having topped out at 23.2bn in assets by the end of 2020, the category rose 26.7% during Q1 of the new year, up to €29.4bn. 

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However, diverging from the trends of last year was the ‘old economy’ with a rotation back to cyclical equities fully underway at the start of the year.  

“The much talked about rotation from growth to value found confirmation in first-quarter flows, with value equity strategies netting €5.3bn,” Garcia-Zarate continued. “US large-cap value equity and global large-cap value equity were among the top 10 flow-gathering Morningstar Categories in the period, whereas US large-cap growth languished in the bottom 10.” 

Also differing from the end of last year were flows into bond ETFs which dipped from €9.8bn to €4.3bn between the two most recent quarters. 

While US Treasuries and UK gilts struggled amid yield hikes, European and US inflation-linked bond ETFs picked up €1.2bn new assets. Likewise, Chinese government bond ETFs saw €2.9bn inflows.  

“Their appeal is easy to understand from a risk/return perspective,” Garcia-Zarate said on Chinese Treasuries. “They offer a tasty yield pickup compared with developed-markets government bonds and have proved remarkably resilient within the cohort of emerging markets.” 

Finally, smart beta staged a comeback pulling in €9.6bn new assets versus €3.8bn during the previous quarter aided by the dramatic return of value. Value ETFs alone saw €5.3bn inflows.

Small-cap strategies have also continued their recovery in recent months, though dividend strategies remain the largest smart beta category in Europe.