The European ETF industry experienced its best ever year yet in 2015, with net inflows at a record high €70.8 billion, greatly surpassing the previous high of €51 billion recorded in 2008.
The combination of record high net inflows plus overall capital appreciation across most asset classes of €19.6 billion has pushed assets under management (AUM) in exchange traded products up by 24% year-on-year to €467.4 billion from €377 billion at the end of 2014.
Together with 2014 – another year of high inflows by historical standards – the data seems to indicate that the European ETF industry has entered a phase of strong growth, thus giving credence to industry predictions that foresee AUM hitting the €1 trillion mark by 2020. This trend is underpinned on the growing awareness by the European investor community of the benefits of low-cost investing.
European Equity ETFs Prove Most Popular
Equity ETFs gathered €42.7 billion of net new money, 60% of total, with investors putting a brave face during periods of intense volatility that saw steep falls in valuations in the middle of year. AUM in equity ETPs went up to €318.7 billion from €255.1 billion in 2014.
2015 was the year when European investors turned their attention to home turf. Finding comfort on the measures implemented by the ECB, investors bought into the European recovery story with gusto. Seven out of the top-ten money-gathering equity ETPs in 2015 provide exposure to mainstream European/Eurozone equity benchmark, such as Eurostoxx 50 or MSCI Europe.
Elsewhere, investors showed interest for the Japanese, and to a lesser extent for the US, equity markets. Financials also did well, thus signalling a turnaround in fortunes for the European banking industry.
At the other side of the preferences spectrum we find emerging markets, and in particular Chinese and broad Asian ex-Japan equity market exposures.
Although the bulk of inflows was directed at mainstream benchmarks, it is worth highlighting the positive impact of strategic beta ETFs. At this stage, the great majority of strategic beta ETFs provide exposure to equity market factors. Return-oriented strategies (for example, dividend-enhanced, value, growth) continued to attract strong interest, while risk-oriented strategies, particularly minimum volatility, benefited from the rise in market volatility.
Bond Funds Continue to Attract Inflows
Fixed income ETFs attracted €23.4 billion in net new money in 2015, 33% of total inflows. This is a solid outcome for an asset class which offered investors little in the way of capital appreciation. In fact, the increase in AUM in fixed income ETFs from €106.7 billion from €81.9 billion in 2014 was almost entirely due to the contribution of net inflows.
The most popular fixed income ETFs in 2015 provided exposure to the corporate bond market. Interestingly, high yield bonds – both European and U.S. – did very well, despite heightened volatility in this asset class, particularly in the US, in the latter part of the year.
Investors were not keen on emerging market debt. However, the Morningstar Category that experienced the highest outflows was that of long-dated EUR-denominated debt. The risk-reward of placing positions at the far-end of the curve was hardly appealing. Besides, despite the maintenance of monetary stimulus in the Eurozone, global trends advised a shortening of duration.
Commodities Return to Favour
Commodity products – mostly exchange-traded-commodities (ETCs) – gathered €1.15 billion of net new money in 2015 after two years of outflows. However, that the bulk of inflows took place in the first quarter. Besides, the fall in oil prices did little favour to valuations, with total AUM in commodity ETCs and ETFs down to €27.74 billion from €29.5 billion in 2014.
Money market ETFs also registered a positive outturn after three years of outflows. Key here has been the money flowing into enhanced cash products (that is, funds offering returns in excess of prevailing money market rates) which tapped into the demand for cash-management tools appropriate for the era of zero-bound – even negative – rates in the Eurozone.
A Brief Peek into 2016 and Beyond
It is difficult not to feel optimistic about the European ETF industry’s prospects for the coming years. Regulatory changes – particularly Mifid II, due in 2017, which is expected to include the banning of retrocessions – are expected to radically alter the way investment advice is given in Europe. The assumption is that will open up retail distribution channels to low-cost investment propositions such as ETFs, thus making it easier for providers to reach the European retail investor community, which, as of now, remains largely untapped.
In the meantime, we should expect the European ETF industry to continue its innovative efforts in 2016, particularly so in the field of strategic beta. In that respect, we would welcome more of a focus on fixed income, where so far there have been little in the way of strategic beta product launches.
Also, 2016 could be the year when actively-managed ETFs take off. At the end of the 2015, Vanguard launched a number of active ETFs providing exposure to equity market factors. These ETFs will compete for market share away from passively-managed strategic beta ETFs. If successful, this may spur other providers to more keenly look at the merits of active management within the ETF wrapper.
On a different note, we continue to expect physical replication to continue expanding its grip in the ETF market. Although Morningstar has no bias when it comes to replication, the reality is that investors have been voting with their money in favour of physical funds for a number of years. The two main synthetic providers of yesteryear, namely db x-trackers and Lyxor, continue their transitioning towards a largely physical business model. The market share of swap-based ETFs has dropped below 25%, and, with the exception of a minority of providers, the synthetic replication method is now either dismissed or only used when physical replication is not a viable option.
