Thematic, ESG, and Fixed-Income Products Are Set to Play a Key Role in the European ETF Market in the Coming Years

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Thematic, ESG, and Fixed-Income Products Are Set to Play a Key Role in the European ETF Market in the Coming Years

Investors increasingly rely on ETFs as important building blocks of their portfolios and have clear ideas about the types of product they prefer

September 2020, LONDON—Cerulli Associates’ latest report, European Exchange-Traded Funds 2020: Adding Variety to Low Costs and Transparency, shows that the future is bright for the exchange-traded fund (ETF) market in Europe, with nearly all the ETF issuers surveyed by Cerulli expecting healthy levels of annual growth in the ETF market over the next two years.

ETFs have gone from playing a minor, tactical role in European investors’ portfolios to standing strong as core building blocks; their lower costs may be sustainable as part of long-term buy-and-hold strategies. Cerulli’s research shows that the fastest growth is likely in Switzerland and the U.K., where 50% and 45% of survey respondents respectively expect the passive ETF market to expand at an annual rate greater than 10%.

Several factors are driving European investors’ increasing use of ETF products. More than one-third (35%) of the ETF issuers Cerulli surveyed in Europe consider institutional investors’ increasing adoption of ETFs the major driver of ETF asset growth. A similar number (32%) see the increased availability of fixed-income ETFs and the use of ETFs by digital platforms as two of the other main drivers of ETF asset growth.

Perhaps unsurprisingly, interest in environmental, social, and governance (ESG) ETFs is also mounting among European investors. By the end of May 2020, European ESG ETF assets had reached €36.5 billion (US$41.0 billion), a 28% increase from the end of 2019. Furthermore, 57% of the ETF issuers Cerulli surveyed identified the development of ESG ETF products as a top priority for their firms over the next two years.

“The European ETF market has become increasingly crowded in recent years, with new players arriving and incumbents broadening their product ranges,” says Fabrizio Zumbo, associate director in Cerulli’s European asset and wealth management research practice and lead author of this report. “Entering these markets with a standard value proposition may no longer be enough to attract flows from sophisticated investors. ETF issuers should develop specialized offerings with robust and diversified ESG value propositions, including active and smart beta products, to differentiate themselves.”

In addition, demand for thematic ETFs is increasing and so-called “mega trends” will help drive further growth in the European ETF market. The most popular themes are expected to be linked to water, biotech, and various other forms of technology.

“Several of the distributors we spoke to like thematic ETFs largely for their attached stories—it is easier to gain investor buy-in for a product that has a clear narrative. ETF developers need to consider this when marketing their products to wholesalers,” adds Zumbo.

Fixed-income ETFs are also set to be in high demand over the next two years and will be at the core of ETF issuers’ product development efforts. They proved their resilience earlier this year, passing the so-called “liquidity test” under stressed market conditions, and investors’ comfort with such instruments has increased following the high level of volatility in the market during the first quarter of 2020, triggered by the coronavirus pandemic.

 

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NOTES TO EDITORS:

The Cerulli Report—European Exchange-Traded Funds 2020: Adding Variety to Low Costs and Transparency features an in-depth analysis of the evolution of the European ETF industry and emerging trends in the main markets across Europe. With an increasing number of asset managers entering the ETF industry, Cerulli’s team of international analysts examined the state of ETF distribution across the main European asset management markets and assessed the implications for ETF providers.

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