European investors were generally in a risk-on mode over the course of 2021 which could be seen by the fact that equity funds were the best-selling asset type overall. In fact, 2021 was a superb year for the European fund industry as the promoters of mutual funds and ETFs enjoyed record inflows (€724.1 bn) over the course of 2021. These inflows come despite the unclear economic situation caused by the ongoing COVID-19 pandemic, disruptions in the delivery chains of some industry sectors, and steadily rising inflation.
That said, it is remarkable that 2021 was the second year in a row during a global crisis in which the European fund industry enjoyed record inflows. These strong inflows are somewhat surprising since companies and investors had to weather the uncertainty and impacts caused by the COVID-19 pandemic, which should have led under normal circumstances to more cautious behavior from investors. Therefore, it can be assumed that the massive financial and fiscal actions taken by governments and central banks around the globe have boosted the confidence of investors to stay in a risk-on mode.
Therefore, it was not surprising that the European ETF industry hit new records in this environment.
Assets Under Management
Despite these tough market conditions, 2021 marked the twenty-second consecutive year with inflows into ETFs, which means that ETFs have never witnessed outflows on an annual basis since their inception in Europe in 2000. The positive performance of the underlying markets led in combination with the estimated net inflows to increasing assets under management (from €992.6 bn as of December 31, 2020, to €1,330.2 bn at the end of December 2021). This means the European ETF industry hit another milestone since the assets under management stood at the first time in history above €1.0 tr. The increase of €337.6 bn for 2021 was driven by the performance of the underlying markets (+€176.6 bn), while estimated net sales contributed €161.0 bn to the increase of assets under management in the European ETF industry.
Graph 1: Assets Under Management in the European ETF Industry, January 1, 2000 – December 31, 2021
Source: Refinitiv Lipper
It was not surprising equity funds (€970.3 bn) held the majority of assets, followed by bond funds (€315.0 bn), commodities products (€31.7 bn), alternative UCITS products (€6.9 bn), mixed-assets funds (€3.1 bn), money market funds (€3.1 bn), and “other” funds (€0.1 bn).
Graph 2: Market Share, Assets Under Management in the European ETF Segment by Asset Type, December 31, 2021
Source: Refinitiv Lipper
Assets Under Management in ESG-Related ETFs
Despite a clear trend toward ESG-related investment strategies in the European fund industry overall, ESG-related products are still underrepresented in the ETF segment, as only 6.18% of the overall assets under management in the European ETF industry are invested in products with an ESG-related investment objective. Nevertheless, ESG-related products enjoyed an above average growth rate as their market share in the European ETF industry grew from 4.86% in January 2021 to 6.18% at the end of December.
Graph 3: Market Share by Assets Under Management (December 31, 2021)
Source: Refinitiv Lipper
In more detail, since the ETFs are mainly using equity and bond ETFs as underlying, it is no surprise there are only ETFs with an ESG-related investment objective in these two asset types. As for the overall fund industry, ESG-related strategies are more often used for equities than for bonds. Respectively, ESG-related ETFs held only 2.25% of the assets under management of bond products and 7.75% of equity products.
Since the trend toward ESG-related investment strategies will continue in the future, it is to be expected that the market share of the respective products will increase over time. This is especially true for ETFs, since fund promoters are trying to improve their profiles as “active” investors, as well as enhancing the ESG credentials used to determine the constituents of the indices and strategies used for their products.
ETF Flows in Europe Under a Magnifier
The European ETF industry enjoyed a new record of estimated net inflows (+€161.0 bn) over the course of 2021. In fact, these flows were far above the old net inflow record of €106.7 bn which was reached over the course of 2019 and also way above the rolling one-year average (€46.7 bn).
Graph 4: Estimated Net Sales in ETFs January 2000 – December 2021 (Euro Millions)
Source: Refinitiv Lipper
The inflows in the European ETF industry over the course of the year 2021 were driven by equity ETFs (+€114.3bn), followed by bond ETFs (+€39.7 bn), commodities ETFs (+€3.7 bn), alternative UCITS ETFs (+€2.0 bn), mixed-assets ETFs (+€1.1 bn), and money market ETFs (+€0.4 bn). Meanwhile, “other” ETFs (-€0.02 bn) were the only asset type with estimated outflows for the year.
Graph 5: Estimated Net Sales in ETFs 2021 by Month vs Five-Year Average Flows (Euro Millions)
Source: Refinitiv Lipper
As to be expected from the overall flow pattern over the course of 2021, the monthly flows were above the five-year average flows for the years 2016 to 2020. The low average flows for March and August were driven by outflows from ETFs during these months in different years of the observation period. In fact, March 2020 (-€25.4 bn) and August 2019 (-€8.8 bn) were the only two months during which ETFs faced outflows in the observation period (January 2016 to December 2021).
The general flow pattern of ETFs by month shows that the new record for inflows was driven by strong inflows over the course of the first half of 2021. Even as the flows for the second half of 2021 were somewhat lower than those for the first half, it is noteworthy that the monthly flows for 2021 were, with exception of December 2021, above the five-year monthly flows average.
ETF Flows by Asset Type
A closer look at the flow trends over the course of 2021 shows that European investors were in risk-on mode despite the ongoing economic faulting caused by the COVID-19 pandemic. That said, the general flow trend for ETFs seem to show that investors experienced a fast market recovery in 2020, which means that the measures taken by governments and central banks to cushion the economic aftermath of the global lockdowns have worked so far. In addition, the general flow pattern for 2021 looks like the trend from the second half of 2020 continued over the course of 2021.
Graph 6: Estimated Net Sales by Asset Type, 2021 (Euro Millions)
Source: Refinitiv Lipper
Graph 7: Cumulated Estimated Monthly Net Flows for Bond, Commodities, and Equity ETFs, January 1 – December 31, 2021 (Euro Millions)
Source: Refinitiv Lipper
While money market ETFs faced outflows for the first 11 months of 2021, the asset type enjoyed inflows in December which drove the overall flows for money market ETFs into positive territory. This turnaround left “other” ETFs as the only asset type with net outflows for 2021.
Taking a closer look at fund flows in 2021, it can be concluded that the general trends in the ETF segment followed the general trends in the European fund industry, since equity funds (+€114.3 bn) were the asset type with the highest estimated net inflows overall for 2021. It is followed by bond ETFs (+€39.7 bn), commodities ETFs (+€3.7 bn), alternative UCITS ETFs (+€2.0 bn), mixed-assets ETFs (+€1.1 bn), and money market funds (+€0.4 bn). Meanwhile, “other” funds (-€0.02 bn) were the only asset type that faced outflows for the year.
Graph 8: Monthly Estimated Net Sales by Asset Type, January 1 – December 31, 2021 (Euro Millions)
Source: Refinitiv Lipper
Spotlight on the Flows in ESG-Related ETFs
As to be expected from the assets under management split, the trend toward ESG-related products is also visible in the estimated net flows in the ESG segment. Nevertheless, ESG-related strategies represented only 16.60% of the overall net inflows in ETFs for the year 2021.
Graph 9: Market Share of Estimated Net Sales (January 1 – December 31, 2021)
Source: Refinitiv Lipper
In more detail, the estimated inflows in ESG-related ETFs summed up to €26.7 bn over the course of 2021. These flows were split between equity ETFs (+€24.2 bn) and bond ETFs (+€2.7 bn) compared to estimated net flows of €90.1 bn in conventional equity ETFs and €37.2 bn in conventional bond ETFs. Therefore, it can be assumed that European investors are somewhat reluctant to invest in ESG-related ETFs.
Assets Under Management by ETF Domicile
As ETFs are true cross-border products with sales registrations in multiple countries it is not surprising that the international fund hubs in Europe (Luxembourg and Ireland) are the fund domiciles of choice for the ETF promoters active in Europe. In more detail, the ETF promoters in Europe use 12 countries as domiciles for their products. Ireland (€889.5 bn) is the largest ETF domicile by assets under management in Europe. It is followed by Luxembourg (€295.7 bn), Germany (€61.5 bn), France (€38.9 bn), Switzerland (€36.9 bn), Sweden (€4.9 bn), the Netherlands (€1.7 bn), Turkey (€0.6 bn), Spain (€0.3 bn), Norway (€0.2 bn), Greece (€0.02 bn), and Hungary (€0.01 bn). The reason for the large variety of ETF domiciles can be seen in the effort of some ETF promoters to cater to specific investors in specific countries. To do so, they have to take local regulations—especially with regard to taxes—into account, which may force them to launch an ETF in a specific domicile. Additionally, some ETF promoters in Europe only cater to single markets and have their ETFs domiciled in these countries.
Graph 10: European ETF Domiciles by Assets Under Management, December 31, 2021 (Euro Millions)
Source: Refinitiv Lipper
Given the fact that ETFs are real cross-border products which want to take full advantage of the UCITS passport that enables them to become registered for sales in multiple countries inside the EU, the dominance of Ireland and Luxembourg as ETF domiciles is not surprising. Especially as the local fund associations in these countries (Irish Funds and ALFI) are offering their members help for their international fund distribution efforts inside and outside of the EU. Nevertheless, the distribution of assets under management by fund domicile is one piece of evidence backing up the claim that assets under management in the European ETF industry are highly concentrated.
Graph 11: Market Shares of European ETF Domiciles by Assets Under Management, December 31, 2021
Source: Refinitiv Lipper
In more detail, Luxembourg (€232.5 bn) was the leading domicile for bond ETFs, followed by Ireland (€74.0 bn), Germany (€4.3 bn), Switzerland (€2.2 bn), and France (€1.6 bn).
For equity ETFs, products domiciled in Ireland (€644.4 bn) led the table at the end of 2021, followed by Luxembourg (€212.3 bn), Germany (€56.6 bn), France (€34.3 bn), and Switzerland (€16.2 bn).
Regarding commodities products, Switzerland (€18.6 bn) was driven by precious metals ETFs—the domicile with the highest assets under management—followed by Ireland (€9.1 bn), Luxembourg (€3.4 bn), Turkey (€0.4 bn), and Germany (€0.3 bn).
France (€2.7 bn) was the domicile with the highest assets under management for alternative UCITS funds, followed by Luxembourg (€2.7 bn), Ireland (€1.3 bn), and Sweden (€0.2 bn).
Assets Under Management by Lipper Global Classifications
In order to examine the European ETF industry in further detail, an analysis of the assets under management and flows by Lipper global classifications can reveal more details about the European ETF industry. Overall, the European ETF market was split into 1,651 different peer groups at the end of December 2021. The highest assets under management at the end of December were held by funds classified as Equity U.S. (€296.8 bn), followed by Equity Global (€178.2 bn), Equity Europe (€67.0 bn), Equity Eurozone (€60.9 bn), and Equity Emerging Markets Global (€59.4 bn). These five peer groups accounted for 49.79% of the overall assets under management in the European ETF segment, while the 10-top classifications by assets under management accounted for 60.78%. This means that the assets under management in the European ETF industry are also highly concentrated with regard to the investment objectives of the products. In other words, this means that European investors are using ETFs as core holdings in their portfolios, as one could see from the names of the top classifications by assets under management.
The level of concentration of the assets under management by Lipper Global Classification is even higher when one looks beyond the 10-top peer groups, since only 20 of the 165 peer groups each accounted for more than 1% of assets under management. In total, these 20 Lipper Global Classifications accounted for €983.3 bn, or 73.92%, of the overall assets under management. These statistics mean that the concentration of the assets under management by Lipper Global Classification has increased over the course of 2021. In addition, it was noteworthy that the rankings of the largest peer groups saw some movement in single positions after the market turmoil caused by the COVID-19 crisis and the ongoing recovery. As the positions of the peer groups had been quite stable in the past, this indicates that European investors use ETFs to trade according to their market views. Even as some of these positions might be core holdings, once investors get into risk-off mode they also reduce their exposure to core asset classes.
Graph 12: Ten-Top Lipper Global Classifications by Assets Under Management, December 31, 2021 (Euro Millions)
Source: Refinitiv Lipper
The peer groups on the other side of the table showed some peer groups in the European ETF market are quite low in assets and their constituents are at risk of being closed in the near future. They are obviously lacking investor interest and might, therefore, not be profitable for their respective fund promoters.
Graph 13: Ten Smallest Lipper Global Classifications by Assets Under Management, December 31, 2021 (Euro Millions)
Source: Refinitiv Lipper
The size of a classification can guide investors to the peer groups which may have a high liquidity for trading the underlying ETFs, especially when those peer groups also witness high inflows. Nevertheless, investors need to check the liquidity of an ETF on a case-by-case basis, since liquidity can differ from ETF to ETF and from trading venue to trading venue.
The assets under management by Lipper Global Classification for ESG-related ETFs show an even higher concentration than those for conventional products, since there are only 18 Lipper Global Classifications in which the Lipper database has ESG-related ETFs listed.
Graph 14: Lipper Global Classifications by Assets Under Management in ESG-Related ETFs, December 31, 2021 (Euro Millions)
Source: Refinitiv Lipper
The highest assets under management at the end of December 2021 were held by ESG-related ETFs classified as Equity Global (€25.2 bn), followed by Equity US (€21.8 bn), Equity Europe (€9.3 bn), Equity Emerging Markets Global (€5.0 bn), and Equity Theme – Alternative Energy (€4.9 bn). These five peer groups accounted for €66.2 bn or 80.50% of the overall assets under management in ESG-related ETFs in the European ETF segment.
Fund Flows by Lipper Global Classifications
The net inflows of the 10 best-selling Lipper classifications accounted for €113.8 bn. With regard to the overall sales for 2021 and the structure of the European ETF segment by asset type, it was not surprising that equity funds (+€98.7 bn) dominated the table of the 10 best-selling peer groups by estimated net flows. Equity Global (+€34.8 bn) was the best-selling Lipper global classification in the ETF segment for the year 2021 overall. It was followed by Equity US (+€34.8 bn) and Equity Emerging Markets Global (+€8.1 bn).
These numbers showed the European ETF segment is also highly concentrated with regard to fund flows by sector. Generally speaking, one would expect the flows into ETFs to be concentrated since investors use these products not only to implement their long-term market views within their portfolios, they also use ETFs to execute short-term asset allocation decisions which are often driven by the general trends on the securities markets. Unlike actively managed funds, ETFs are designed for both purposes, therefore they can easily be used by all investors to meet their asset allocation targets.
Graph 15: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, 2021 (Euro Millions)
Source: Refinitiv Lipper
On the other side of the table, the 10 peer groups with the highest estimated net outflows for the year 2021 accounted for €8.4 bn of outflows.
The net fund flows pattern for ESG-related ETFs by Lipper global classification shows a positive picture, since 15 of the 18 Lipper global classifications in which at least one ESG-related fund is listed within the Lipper database showed estimated net inflows, while only three witnessed outflows. Equity Global (+€8.3 bn) was the best-selling Lipper global classification in the ESG-related ETF segment for the year 2021 overall. It was followed by Equity US (+€6.9 bn) and Equity Europe (+€3.0 bn).
These numbers showed the European ETF segment is also highly concentrated with regard to fund flows by sector. Generally speaking, one would expect the flows into ETFs to be concentrated since investors use these products not only to implement their long-term market views within their portfolios, they also use ETFs to execute short-term asset allocation decisions which are often driven by the general trends in the securities markets. Unlike actively managed funds, ETFs are designed for both purposes. Therefore, they can easily be used by all investors to meet their asset allocation targets.
Graph 16: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, 2021 (Euro Millions)
Source: Refinitiv Lipper
On the other side of the table, the three peer groups with estimated net outflows for the year 2021 accounted for €0.03 bn of outflows.
Assets Under Management by ETF Promoter
A closer look at assets under management by promoters in the European ETF industry also showed high concentration, with 24 of the 48 ETF promoters in Europe holding assets at or above €1.0 bn. The largest ETF promoter in Europe—iShares (€605.4 bn)—accounted for 45.51% of the overall assets under management, far ahead of the number-two promoter—Xtrackers (€145.5 bn)—and the number-three promoter—Lyxor ETF (€101.1 bn).
Graph 17: Ten-Top ETF Promoters by Assets Under Management, December 31, 2021 (Euro Millions)
Source: Refinitiv Lipper
It was somewhat surprising that only 11 of the 48 ETF promoters in Europe offer products with an ESG-related investment objective. Unsurprisingly, the largest ETF promoter in Europe—iShares (€31.6 bn)—held the highest assets under management in the segment of ESG-related products. It was followed by UBS ETF (€21.2 bn) and Xtrackers (€11.6 bn).
Graph 18: ETF Promoters with ESG-Related Products by Assets Under Management, December 31, 2021 (Euro Millions)
Source: Refinitiv Lipper
Fund Flows by Promoters
Since the European ETF market is highly concentrated, it was not surprising that nine of the 10 largest promoters by assets under management were among the 10-top selling ETF promoters for 2021. iShares was the best-selling ETF promoter in Europe for the year (+€69.4 bn), ahead of Xtrackers (+€180 bn) and Amundi ETF (+€11.3 bn).
Graph 19: Ten Best-Selling ETF Promoters, 2021 (Euro Millions)
Source: Refinitiv Lipper
The flows of the 10-top promoters accounted for estimated net inflows of €146.6 bn, or 90.89%, of the overall estimated net inflows. With regard to the overall flow trend over the course of 2021, it was clear that some of the 48 promoters (9) faced net outflows (-€0.5 bn in total) over the course of 2021.
Due to the high concentration of the European ETF market, it was not surprising that the largest promoters by assets under management in ESG-related products were also leading the table of the estimated net inflows for 2021. As for conventional ETFs, iShares was also the best-selling ETF promoter for ESG-related products in Europe for the year (+€11.0 bn), ahead of Xtrackers (+€5.3 bn) and UBS ETF (+€4.9 bn).
Graph 20: Estimated Net Sales for ESG-Related ETFs by Promoter, 2021 (Euro Millions)
Source: Refinitiv Lipper
An Analysis of the Total Expense Ratios (TER)
As the European ETF industry is highly competitive one would expect that the total expense ratios in the European ETF segment tend to fall over time, since a low management fee is seen as a competitive advantage if it comes to like-for-like products.
Therefore, it is no surprise that we see a respective pattern over the course of the years 2017-2021 for all asset types with the exception of alternative UCITS products. That said, since alternative UCITS ETFs are not like-for-like products one would expect that the ETF promoter will separate themselves from the competition in this segment. This would allow them to charge on average higher fees.
Graph 21: Total Expense Ratios by Asset Type 2017 – 2021 (in %)
Source: Refinitiv Lipper
Graph 22: Average Asset Weighted Total Expense Ratios by Asset Type 2017 – 2021 (in %)
Source: Refinitiv Lipper
This trend gets even clearer if one looks at average asset weighted TERs since these numbers show the real average TERs paid by ETF investors in Europe. Generally speaking, investors prefer cheaper solutions for the plain vanilla asset types, but they are willing to pay a premium for alternative UCITS and mixed-assets ETFs since they may expect additional returns from more expensive strategies.
Graph 23: Average Asset Weighted vs Average Total Expense Ratios by Asset Type 2017 – 2021 (in %)
Source: Refinitiv Lipper
A comparison between the TERs for ESG-related bond ETFs and their conventional peers shows that the TER for ESG-related bond products has been somewhat stable over the course of the last three years, while the average TER for conventional bond products shows a declining pattern.
Graph 24: Average Total Expense Ratio Bond ETFs by Management Approach 2017 – 2021 (in %)
Source: Refinitiv Lipper
The reason for these patterns can be seen in different investment strategies of these products. While conventional bond ETFs are mainly plain vanilla products which track a standard index, ESG-related bond ETFs track ESG-related indices which require a higher research effort and are, therefore, more expensive to incorporate for the respective ETF promoter. These higher costs are passed over from the ETF promoter to the ETF investor via an average management fee. Another driver behind this pattern can be seen in the market maturity. While conventional bond ETFs have already reached a stage in which the ETF promoter competes on price, the segment for ESG-related is relatively new and offers a space for innovations. As a consequence, there are currently not so many like-for-like ESG-related products available, which means there is less pressure on the management fees for the respective products.
The same is somewhat true for the equity segment of the European ETF industry. Given the fact that the industry started with equity products, it is no surprise to see that the average TER of equity products declined only by four basis points (bps) from 2017 to 2021 as the overall market seems to be quite mature. This means the respective ETF promoters have witnessed a lot of pressure on their management fees in the past and have passed the achieved economies of scale over to the investors. On the other hand, ESG-related ETFs are somewhat new products and witness a lot of demand from investors. This enables the ETF promoters to pass over the higher costs for index licenses and the monitoring of their ESG strategies and a higher profit margin to the investors.
Graph 25: Average Total Expense Ratio Equity ETFs by Management Approach 2017 – 2021 (in %)
Source: Refinitiv Lipper
The views expressed are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.
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