European fund flows demonstrate strong shift to ETFs

European exchange traded funds have had net inflows this year even as open-ended mutual funds have suffered net outflows, a trend experts say is part of a long-term shift towards passive investment.

Open-ended mutual funds suffered outflows every month from February to August, while ETFs have recorded inflows every month except June and July, according to Morningstar Direct data.

ETFs brought in €52bn of flows from the start of the year, while open-ended funds have seen outflows of €141bn in that time. In contrast, open-ended funds attracted greater flows than ETFs every month from April 2020 to January 2022.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, said the difference in flows between ETFs and open-ended funds was part of a gradual movement towards passive investment.

This article was previously published by Ignites Asia, a title owned by the FT Group.

“ETFs as a wrapper are widely considered to be superior,” he said.

“They’ve sailed through Covid and other crises, which strengthened their case when there were question marks about how these funds would work under certain conditions.”

He added that the difference in flows could be seen as something of a vote of no confidence in active managers.

“One of the supposed benefits of active managers is their ability to prove their worth in a bear market,” said Lamont.

Ralph Williams, associate director of Europe, the Middle East and Africa insights at Broadridge, said positive ETF flows stemmed from a reaction to this year’s market turmoil, the market performance of commodities and a longer-term trend of passive funds gaining market share.

“ETFs are generating growing interest among retail investors thanks to attractive pricing,” he said.

“This rotation is something we’d expect to see continue over the coming years, regardless of market direction.”

Michael O’Riordan, founding partner of ETF consultancy Blackwater Search and Advisory, said the difference in flows came down to cost and convenience, even in difficult market conditions.

“Every time there are turbulent markets we see the same thing, outflows in mutual funds, even though mutual fund managers always preach that in times of choppy markets it’s best to be in active mutual funds,” he said.

“I guess investors disagree with that sentiment, if the numbers are anything to go by.”

O’Riordan added that he was surprised there were not more mutual fund managers looking to launch an ETF strategy in Europe.

“It is clear that the industry is shifting, so why not look to position yourself for that and avail of the opportunity,” he said.

“Instead they choose to bury their heads in the sand and stick with a technology that has been around for over 50 years rather than adapt with the times.”

Franklin Templeton, Axa Investment Managers and Fineco Asset Management have all recently entered the European ETF market, while AllianceBernstein is planning to do so, having recently launched its first ETFs in the US.

Andrea Murray, head of business development at Blackwater Search and Advisory, said the industry would continue to see strong sales of ETFs compared with open-ended funds.

“We absolutely expect this to continue as investors become more aware of the advantages of the ETF wrapper through ease of trading in volatile markets, lower cost structure and the diversification across all asset classes,” she says.

“This is not the old active versus passive debate — this is the evolution of investors opening their eyes to the benefits of having both products within the portfolio allocation and catching up to other markets, like the US, which have fully embraced the ETF wrapper for years.”

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.

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