Christopher Johnson: 2024 saw record inflows for ETFs and ETCs as passive products continue to dominate the investment landscape. But what is driving this trend? To discuss all this and more I’m joined by Jose Garcia Zarate, Associate Director Manager Research at Morningstar. Jose, thank you for being here with me.
Jose Garcia Zarate: Thanks for having me.
CJ: So my first question to you is that flows in 2024 totalled around €247 billion, a record year for European ETFs and ETCs. So what is behind this?
JGZ: Well, low cost passive products like ETFs have been gaining traction for many years now and are not for a specific market exposure, such as U.S. equities. They’ve become the default investment vehicle to invest because it’s very difficult for active managers to actually beat benchmarks such as the S&P 500 over the long term. What we saw in 2024 is that whoever was interested in equities was primarily interested in the United States. And so, the bulk of the flows went into a passive products, and particularly ETFs. And we talked about massive figures. And that’s basically been the key driving factor behind the record flows into European ETFs last year.
Why Is BlackRock’s iShares the Top Dog?
CJ: I’m also interested in learning about why iShares remains the top ETF provider in Europe. What are they doing that other people just aren’t or other providers?
JGZ: Well, they have the kind of like the first mover advantage, right? And not just with equity products, but also with fixed income products. I think that, they really understand very well the nuances of what remains a very fragmented market, geographically speaking, and how the investor base varies from one country to another. And they’re also very cognisant that they run a supermarket type of business where investors should be able to find almost anything they want. And so that means that they are very proactive in their product development agenda. And they pulled no punches when it comes to defending their market share.
Did Trump’s Win Boost ETFs?
CJ: And how did Trump’s electoral victory influence fund flows last year?
JGZ: I mean, the performance of U.S. equities have been positive for a number of years. I mean, primarily driven by, you know, these handful of tech stocks, but also, as a reflection of the strength of their economy. So you know, with Trump’s big victory, it’s only added to the existing, positive momentum and sentiment around, the US equity markets, I guess that now investors expect that the policies of Trump are going to be unashamedly supportive of US interests, and they’re just happy to continue riding the momentum. And, as I said earlier, you know, if all they’re mostly being aided by passive funds at this stage.
CJ: And could 2025 be the year we see a reversal in the overall outflows from ESG ETFs? What do you think?
JGZ: Well, outflows is not actually correct. I mean, there’s been a substantial decline in inflows. But you know, obviously we’re not there yet. But it’s true that ESG has had a couple of tough years, particularly since 2022 and this is, due to a mix of underperformance, I would say relative to mainstream or non ESG investments, but also, a lot of regulatory uncertainty. Short term prospects. They don’t look particularly positive. I mean, on the one hand you’ve got Trump who’s very unapologetic, you know, anti-ESG agenda.
JGZ: Then on the European side, we’ve still got a lot of uncertainty about the shape of the market. You know, we know that a new regulation about naming conventions is coming up. We don’t know, how the market is going to look like at the end of 2025, but it’s highly likely that many ETFs, and not just ETFs, but funds in general who up to this point have been sold as sustainable and will cease to be so in a few months time. So all this regulatory uncertainty is negative. Its true, I guess that, you know, the European investor base remains more committed to ESG and sustainability than other investors in other regions. But they also care about performance. So, unless we see that, you know, sustainable funds delivering the goods in terms of performance, I think it would be difficult to imagine that the trend is going to reverse anytime soon.
Why Are Active ETFs Growing?
CJ: And in your view, why are active ETFs becoming so popular?
JGZ: This is an interesting segment of the market. Although, you know, I must say, you know, it remains a fairly, niche or tiny market still in Europe in particular. You know, they only represent about 2.5% of assets invested in ETFs. But the expectations of further growth, but not to the same extent as in the United States. And that’s because in the United States, the ETF wrapper is fiscally as a vehicle, it’s basically much more, efficient than the traditional mutual fund structure. So what I’d say is, in Europe, the prospects, for further growth of activities are closely linked to the characteristics of the ETF as an investment vehicle. It’s you know we’re talking about immediacy, transparency generally also lower costs. These characteristics are valued by an increasing number of investors. And so what we’re seeing is that asset managers who were not interested in ETFs in the traditional passive format, are now dipping their toes into the ETF market by launching active strategies. So all I can say is, it’s definitely, sort of like an interesting area that will keep on monitoring very closely.
CJ: Jose, thank you so much for being here with me.
JGZ: Thank you.
CJ: This is Christopher Johnson for Morningstar UK.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
