January 21, 2019

Monday Morning Memo: 2018 was an outstanding year for ETFs in Europe

by Detlef Glow.

The year 2018 was an outstanding year for exchange-traded funds even though it was a tough year for the European fund industry overall. The return of volatility caused by uncertainties coming from a possible trade war between the USA and China, the ongoing Brexit discussions, and a possible return of the euro crisis after the forming of a government in Italy led European investors to reduce the risk in their portfolios. The corresponding transactions led to overall outflows of -129.2 billion euro from mutual funds registered for sale in Europe over the course of 2018. In contrast to their actively managed peers (-171.4 billion euro), ETFs registered for sale in Europe enjoyed inflows of 42.2 billion euro and had another positive year.

Graph 1: Fund Flows by Product and Asset Type 2018 (in billion euro)

ETFs vs Mutual Funds - Review 2018

Source: Lipper

With regard to the fund flow numbers above, some market observers witnessed a slowdown in the growth of ETFs in Europe. This is true if one compares the 2018 numbers to the inflows in ETFs over the course of 2017 (+94.7 billion euro). But in fact, 2018 was the third best year in history with regard to ETF net sales in Europe. Given the fact 2017 was a record year for both actively managed funds and ETFs, the net sales in ETFs for 2018 look even more impressive since actively managed funds had massive outflows.

Some readers might be surprised that European investors prefer passive products in a shaky market environment, as some critiques do raise the point that a negative market environment would harm passive instruments more than actively managed funds. This is because active managers can use cash as a risk buffer, while passive products are always fully invested. Even though this is true, history has proven active managers do not generally use cash to protect their investors from market losses.

That said, even though ETFs are not intended to hold cash, they offer the investor a transparent portfolio; i.e. the investor does know in which securities he is invested and can make informed decisions if he wants to own the respective positions or not. In addition, ETFs offer intraday liquidity, which means that investors can buy/sell the shares of an ETF at any time during the respective trading hours and are not hardwired to a cut-off time to submit their orders for the respective day.

From my point of view, this means that investors have understood what they can expect from an ETF and how they can use the product features for their advantage. That said, for me it is quite sure that ETFs have become mainstream amongst European investors and are set for another successful year ahead.

The views expressed are the views of the author, not necessarily those of Lipper or Refinitiv.

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