Index products have seen significant inflows at the expense of active products, reflecting increasing interest from both institutional and retail investors. The outlook for Europe remains positive in the coming years. Bond ETFs in particular still have strong growth ahead of them.
Last year was a tough one for financial markets, and the ETF segment was not left behind as assets under management - at the global level - fell for the first time since 2011.
However, Charles Symons, head of BlackRock’s iShares in Belgium and Luxembourg, pointed out that when the market effect of the correction is removed, net flows remain very positive. “In fact, it was a pretty exceptional year, the second best in ETF history in terms of inflows, with organic growth of 8 per cent,” he said.
Performance mixed
In particular, he pointed to flows of $598 billion into equity ETFs and $266 billion into bond products at the overall market level. Sustainable ETFs, corporate bonds and dividend stocks were particularly supportive, while European equity ETFs, emerging market bonds and commodities performed poorly.
“As for the Chinese equity ETF, 2022 had a relatively difficult start to the year, before volumes recovered strongly in the last quarter following the easing of health policies and a more business-friendly approach by the government. And this movement looks set to continue in early 2023.”
Tactical exposure
Symons said this growth in ETFs has come at the expense of actively managed funds, which suffered net outflows of nearly $1 trillion last year. ETFs also accounted for 32 per cent of global exchange-traded volume in 2022, up significantly from the previous year (25 per cent).
He also notes that it is no longer just institutional investors who use index products, but young investors too prefer them to take their first steps into the financial markets. “More and more active managers tend to use ETFs to get into a market quickly, especially in bond markets to gain tactical exposure to less liquid asset classes.”
“Similarly, investors can gain exposure to a very wide range of bond issues by buying one ETF, while it has become virtually impossible for an individual to build a bond portfolio in separate lines. While the bond ETF market barely mattered a decade ago, we think it could grow to $5 trillion by the end of this decade.”
Democratisation
Symons also elaborated on iShares’ evolution in Europe. “In Europe, the market for index products grew 11 per cent between 2010 and 2020, and we expect the pace to remain above 10 per cent per year until 2027, by which time the market size should exceed $4 billion.”
One of the drivers of this growth is the relatively low penetration of ETFs in Europe compared to the US. “This situation will continue to evolve as investors increasingly build their portfolios by starting with index investment plans, which have the advantage of a more favourable cost structure,” he said.
This article originally appeared on InvestmentOfficer.be.