Fund flows confirm major switch to ETFs from mutual funds

An in-depth analysis of European investment fund flows in the first half of this year has confirmed that investment managers are shifting fund investments towards Exchange Traded Funds (ETFs) at the expense of traditional mutual funds. The shifts are clearly visible both in Ireland and Luxembourg, Europe’s two leading hubs for ETFs, recent data from LSEG Lipper shows. 

BlackRock was the biggest-selling fund promoter in the first half, accounting for more than half of all net ETF sales in Europe with 44 billion euro in inflows, the report showed. JP Morgan, Vanguard, BNP Paribas and Swisscanto completed the top five with first-half inflows of more than 10 billion euro inflows each. BlackRock alone generated more than 30 billion euro in European ETF sales between January and June.

While mutual funds collectively faced estimated net outflows of 28.6 billion euro, ETFs enjoyed inflows of 70.2 billion over the course of the first six months of 2023. LSEG Lipper noted that the last time ETFs enjoyed inflows while mutual funds faced massive outflows was over other rough market periods such as the fourth quarter of 2018 or the financial crisis.

At the end of June it looked like the trend towards passive products had accelerated further, LSEG Lipper said, since both ETFs and passively managed index mutual funds (+20.1 billion euro), while active managed mutual funds faced outflows (-48.6 billion euro). 

ETF assets hit new all-time high

At 14,087.5 billion euro, the overall assets under management in the European fund industry were still below their all-time high of 15,266.2 billion at the end of 2021. Despite this, the assets under management in the European ETF industry hit a new all-time high at the end of June 2023 at 1,407.7 billion euro.

Equity funds, with 5,877.7 billion euro, held the biggest chunk of assets under management in the European fund industry at the end of June 2023. It was followed by bond fund (3,115.6 billion euro), mixed assets funds (2,456.9 billion), money market funds (1,623.5 billion), alternatives funds (577.0 billion), real estate funds (300.3 billion), “other” funds (73.5 billion), and commodities funds (63.2 billion).

Luxembourg US Equity funds shrinking

Although Luxembourg experienced clear outflows in fund classes investing in US Equities - 7.7 billion euro during the first half - there is no evidence that this shift coincides with a move towards Ireland, which is considered more attractive for this asset class because the 15% tax benefits from the Irish-US treaty on withholding taxes paid on dividends paid by US companies.

“Even though one may expect that these outflows were invested in Irish domiciled ETFs, to take advantage from the taxation agreement between Ireland and the US, it is fair to say that these flows are not reflected in Equity US ETFs. Therefore, these flows might be rather seen as profit taking,” said Detlef Glow, head of EMEA research at Refinitiv Lipper.

Estimated fund flows by domiciles, January – June 2023 

(in billion euro. Black is ETF flows. Blue is mutual funds.)

Overall in Europe, fund flow numbers for Equity US classes showed 4.1 billion euro in outflows for actively managed funds during the first half and 2.8 billion euro in inflows to ETFs. At a positive 100 million euro year-to-date, overall fund flows for Ireland were heavily impacted by the aftermath of the 2022 debt crisis in the UK. 

Mixed-assets funds drive Luxembourg outflows

LSEG Lipper’s European Fund Flow Trends Report shows that Luxembourg domiciled funds witnessed significant outflows, with mixed-assets funds being the main driver behind the decline. Notably, Mixed Asset EUR Flexible - Global (-€6.7 billion), Mixed Asset EUR Balanced - Global (-€4.9 billion), and Mixed Asset EUR Conservative - Global (-€3.9 billion) collectively accounted for more than half of the overall outflows from Luxembourg domiciled mutual funds, totaling €26.5 billion.

The report suggested that these outflows may be attributed to the underwhelming performance of certain mixed-assets funds throughout 2022. Additionally, a portion of the outflows, especially in Mixed Asset EUR - Conservative funds, could be a result of a broader asset allocation shift, as some investors have utilised these products as replacements for bond funds in the low interest rate environment.

Another contributing factor to the outflows from Luxembourg domiciled funds came from funds classified as Equity Europe, amounting to 5.6 billion euro. This trend aligns with a long-standing pattern in the European fund industry, wherein European investors have consistently been net-sellers of European equities funds.

Robust inflows for Luxembourg bond funds

On the flip side, Luxembourg-domiciled funds categorised as Money Market USD witnessed a substantial influx of 23.5 billion euro, indicating that European investors sought to capitalise on the inverted yield curve in the US. Following closely behind were Target Maturity Bond EUR 2020+ (+6.3 billion euro), Bond USD (+5.7 billion euro), Bond Global EUR (+3.8 billion euro), and Bond EUR Corporates (+3.3 billion euro), showing robust inflows into Luxembourg domiciled bond funds. This movement suggests a clear shift in investor preference from equity and mixed-assets funds to bond funds within the Luxembourg domicile, LSEG Lipper said.

Related articles on Investment Officer Luxembourg:

• Luxembourg in catch-up mode as Ireland leads in ETFs
• iShares: bond ETF market can grow to $5,000 billion
• Naming rules divergence in ETF hubs creates confusion