Despite a small contraction in assets caused by a complex market and macroeconomic scenario in Europe and at the global level last year, exchange-traded fund (ETF) products continue to gather net-new money from investors, according to Cerulli Associates’ latest report, European Passive Investments 2023: An Increasingly Diverse Marketplace. By the end of June 2023, assets in these products reached a new high, with growth underpinned by a product set that is becoming larger, more diverse, and more specialized.

The assets of index mutual funds domiciled in Europe also recovered during the first half of 2023, having experienced a contraction in 2022. Institutional investors across Europe are driving growth. According to the research, index funds are predominately used by institutional investors and 66% of index fund providers expect institutions to show the greatest demand for these vehicles over the next two years. In addition, 55% expect asset managers (e.g., fund-of-funds managers) and private banks to be the primary drivers of index fund demand.

Exactly half (50%) of ETF issuers across the seven major European markets anticipate moderate asset growth (6% to 10%) for active ETFs over the next 12 to 24 months and 12% expect fast growth (more than 10%). Although only 17% of the fund selectors and intermediaries report active ETFs are among the types of ETF they use most today, 24% are looking to use them more in the near future.

“The European ETF market has seen many new product launches, fostered by strong product development and marketing efforts,” says Fabrizio Zumbo, director of Cerulli’s European retail and wholesale asset management research. “We are seeing a higher level of specialization in the vehicles available to European investors, who are increasingly familiar and comfortable with the ETF vehicle. Even so, the majority of assets are still allocated to passive ETF products.”

Three-quarters (75%) of European ETF issuers Cerulli across Europe believe that environmental, social, and governance (ESG) investing is an area where active funds can compete with passive funds more effectively. Nearly two-thirds (64%) of fund selectors and intermediaries agreed. In contrast, 80% of fund selectors and intermediary respondents believe that the increasing availability of passive ESG funds is enabling their firms to construct sustainable portfolios in a more cost-effective way.

In most major European markets, growing demand for passive funds is focused more on ETFs than index mutual funds. Index funds and ETFs based on broad indices remain the most popular types of passive fund and more than three-fifths of the fund selectors and intermediaries are considering using them more over the next 12 to 24 months. In addition, more than half of respondents count passive funds based on regional exposures among their most-used types currently. Country-specific ETF and index fund use is less common.

“Greater acceptance of the ETF wrapper is accelerating passive fund adoption in Europe,” adds Zumbo. “Fund selectors and intermediaries in all the major European markets covered by Cerulli’s research believe they will be using ETFs more over the next year, although they acknowledge that lighter equity allocations and growing alternative allocations are potential headwinds.”

More than three-fifths (62%) of the European fund selectors and intermediaries identify sector/thematic ETFs as a product type they are considering using more in the next one to two years; 51% also want to expand their use of index mutual funds in this area. Fund selectors and intermediaries consider thematic equity a top-three sector for unmet demand in the index mutual fund arena. Respondents also identify alternatives as an area where they would most like to see ETF launches: more than half (53%) of the fund selectors and intermediaries surveyed regard alternatives as a top-three sector for unmet demand in the ETF space.