ETFs – flows and forecasts
An interview with Clemens Reuter and Willem Keogh
Indexing and ETFs continue to play a central role in the evolution of the asset management industry. Driven by the philosophical investment tension between active and passive approaches, the megatrend shows no signs of abating. Clemens Reuter and Willem Keogh offer their views on key trends in the market and what the future holds for ETFs.
What have ETF flows been like over the past 5 years?
What have ETF flows been like over the past 5 years?
Globally, ETF assets are approaching USD 13 trillion.1
The European ETF industry has recently surpassed the USD 2 trillion mark. Since January 2020 we have seen inflows of nearly USD 700 billion into UCITS ETFs. In 2020, COVID-19 had a major impact on markets and there was a dramatic increase in flows into sustainable ETFs, which lasted through 2022. During that period, sustainable ETFs gathered more than half the nearly USD 400 billion inflows.
During 2022 and 2023, we saw the return of yield in fixed income. As central banks started raising interest rates to combat inflation, this translated into substantial flows of more than USD 100 billion into UCITS fixed income ETFs. For context, total inflows were USD 260 billion.
Sustainable flows have plateaued over the last 18 months or so. European investors have made major allocations to traditional core equity benchmarks, with inflows of nearly USD 150 billion since January 2023. So far this year we have seen a continued slowdown in sustainable inflows for equity and fixed income ETFs (USD 20 billion equating to 15.3% of net new money (NNM)), while fixed income ETFs gathered just over USD 37 billion (29.1% of NNM). The vast majority of flows continued into core equity benchmarks (nearly USD 81 billion out of USD 130 billion of flows, representing 62.6% of NNM).2
Have you seen any interesting shifts in the buyer base for ETFs?
Have you seen any interesting shifts in the buyer base for ETFs?
We are starting to see a generational shift in personal investing, with a greater focus on digital platforms. This is opening up new opportunities to distribute ETFs. Globally, more than USD 68 trillion could be passed from baby boomers to millennials by 2030.3 Unsurprisingly, younger investors have a preference for digital investing, where online platforms and distribution channels help the management and monitoring of investments in “real-time”. Retail investors are becoming an increasingly important segment for future growth of easy to understand, direct-to-market products, which can be traded via a digital interface.
Many providers have repriced their ETFs recently. What have you observed?
Many providers have repriced their ETFs recently. What have you observed?
Indeed, we have seen competitors reprice the Total Expense Ratio (TER) of numerous ETFs; competition on fees remains intense. At the end of 2023, we also repriced ETFs across our shelf. The scale and breadth of our indexed capabilities enabled us to provide competitive pricing while remaining committed to the highest levels of quality. For investors, there has never been a broader selection of ETFs at such attractive prices.
What are your views on market concentration in certain markets like the US?
What are your views on market concentration in certain markets like the US?
With the advent of mega-cap stocks (a.k.a. the Magnificent 7) in the wake of COVID-19, the weight that the United States represent in the MSCI World has increased 72%. For reference, this trend was already underway earlier: in January 2015, the US represented 57.7% which grew to 63.8% in January 2020.4
What about active ETFs?
What about active ETFs?
Active ETFs have been popular with US investors looking for targeted exposures as well as the benefit of ETFs being more tax efficient than mutual funds. Some investors also seek active management in certain asset classes and strategies, for example in fixed income and thematic investing. While active ETFs represented 6% of ETF assets in the US, in Canada and Australia they account for more than 26%.
In terms of Europe, we have noticed that a couple of competitors (mainly US-based ETF providers) have launched actively managed ETFs as a way to differentiate their offering. Actively managed UCITS ETFs current account for USD 42.8 billion, equating to around 2.1% of total ETF assets.5
The key question around active ETFs is whether these solutions are enhanced indexing concepts, rather than being alpha generating strategies as associated with traditional “active” investment management.
What is the outlook for ETFs in Europe over the coming years?
What is the outlook for ETFs in Europe over the coming years?
In the latest edition of the annual PWC review of the ETF market, six out of ten survey respondents believe that European ETF assets will reach USD 3 trillion by June 2028. It is expected that heightened demand for ETFs over the next couple of years will come from retail investors, model portfolios, financial advisers and intermediaries.
Interestingly, the survey highlighted the millennial investor opportunity as investor studies have shown that millennials highly favor ETFs because they typically manage their own investments. Marketing through social media platforms, podcasts and apps will be important to target these millennials who prefer real-time information.6
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