The European exchange-traded fund and exchange-traded commodities market gathered EUR 27.3 billion in October 2024, the best monthly result ever recorded. This brought the total net inflows since the start of the year to EUR 188.3 billion: almost 30 billion more than the annual all-time record set in 2021.

With two months still to account, 2024 is bound to be a new record-breaking year for the European ETF industry.

Assets under management grew by 24% between December 2023 and October 2024, to surpass the EUR 2 trillion barrier for the first time. The bulk of assets – EUR 1.44 trillion, close to 71% – remain invested in equity strategies. Assets in bond ETFs closed October at EUR 431 billion, 21.1% of the total.

The Way to Wall Street Is Passive

What is driving this trend? “Several factors, including the ongoing preference for low-cost solutions and the increasing popularity of the ETF wrapper as vehicle of choice for passive investors”, explains Jose Garcia Zarate, Associate Director for Passive Strategies at Morningstar. “But also importantly, 2024 has been a year when investors have placed the bulk of their money into equity products with a heavy US bias, where passive funds have become the default option”, he continues.

Indeed, US equity has been the key focus in 2024. About two-thirds of all flows into equity ETFs in Europe this year have gone into U.S. single market ETFs or Global Developed equity ETFs, where the US has a large weight.

“Even investors concerned about potentially excessive market concentration in tech stocks in the US have found it difficult to ignore the strong momentum of the market. Some may have opted for risk management strategies such as equal-weighted ETFs (e.g. S&P 500 equally weighted), but what they have not abandoned is their focus on the US market”, Garcia Zarate adds.

Bond ETFs Gain Ground

Fixed income has also gathered some healthy flows this year, considering that yields are now falling. For example, fixed-term bond ETFs have been a particular area of interest, with investors keen to lock in relatively high yields before the start of the rate cutting cycle around mid-year. These strategies’ portfolios carry bonds whose expiry date is aligned with the fund’s target maturity date, and all the bonds are held to maturity.

Fixed-income ETFs show a 11.5% organic growth rate so far in 2024, which is comparable to that of equity ETFs. So, are ETFs taking a leading role within the bond universe as well? According to Garcia Zarate, “this is more of a long-term objective for ETF providers.”

There is plenty of room to grow the fixed income ETF pie, but “it requires an additional educational effort to convince fixed income investors to see the virtues of accessing bond markets via a vehicle that trades like a stock,” Garcia Zarate says. “The one thing the ETF providers tell us is that once bond investors understand and try ETFs for bond allocation, they become keen supporters of the wrapper and value its simplicity over the traditional way. But, as mentioned, we’re still in the initial stages of the journey”.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.