A view on the estimated net flows into bonds (+€170.7 bn) in the European fund industry for the year so far shows that European investors prefer mutual funds (+€117.6 bn) over ETFs (+€53.1 bn). This seems to make sense since bonds are an asset type in which active management should be able to deliver additional returns. When investing in bonds, active fund managers have the chance to choose bonds with attractive valuations from the issuers with the best outlook for their solvency (rating), while passive mandates, for plain vanilla ETFs, track an index in which the constituents are weighted by the outstanding debt. Hence, the investors give the largest portions of their money to the issuers with highest outstanding debt, an approach which only a few would follow in their private life.
Graph 1: Estimated Net Flows (in bn EUR) in Bond Products by Product Type (01.01.2026 – 31.08.2026)
Source: LSEG Lipper
A more detailed view into the fund flow trends shows a different picture. European investors only invested (+€50.3 bn) in actively managed products (mutual funds +€43.2 bn, ETFs +€7.1 bn), while (+€120.4 bn) were invested in passive products (index tracking mutual funds +€74.4 bn, passive ETFs +€46.0 bn).
These flow numbers were somewhat surprising for me given the market environment for bonds and the fact that I thought that European investors follow the assumption that active management can add value in the bond segment, especially in the segment of corporate bonds, as an active manager just has to avoid the losers (those issuers who default or get downgraded by rating agencies) to beat a broad market index. In addition, active managers can use the sweet spots in the yield curve or choose bonds which are mispriced by the market to generate additional returns.
Generally speaking, it is even more surprising that European investors choose index tracking mutual funds over ETFs, as ETFs are often cheaper, in terms of their Total Expense Ratios (TERs), and offer intraday liquidity in case the portfolio manager wants to change the allocation of the single bond types or the duration of the portfolio immediately.
If I had to guess, I would assume that these flows are mainly driven by institutional investors such as pension funds, etc. who may work with advisors, consultants, trustee boards, and others who may stick to index-tracking mutual funds, as these are the products they have always used. To defend this stance, it needs to be said that especially pension funds change their asset allocation only very slowly, since these portfolios are constructed as long-term investments and may in most cases not need the speed ETFs offer when it comes to changes in the asset allocation.
This leaves the fees as a decision factor on the table. When it comes to this, I would assume that most large pension funds have very favorable fee agreements in place which offer them discounts and/or reimbursements of the management fees as they are long-term investors who are buy large amounts of fund shares and hold them for a long time.
Even as these reasons are valid, this might be a subject of change, since ETFs are traded on an exchange and can therefore be integrated in the respective workflows, which makes them quite efficient for the service providers such as custodians, etc., who may in return charge lower fees for investors who use more efficient products. In addition to this, it needs to be said that even as ETFs offer intraday liquidity, they can be held as long-term investments. Nobody forces an investor to become a (day) trader, because he is using ETFs.
This article is for information purposes only and does not constitute any investment advice.
The views expressed are the views of the author, not necessarily those of Lipper or LSEG.
