July 20, 2020

Monday Morning Memo: Review of the European ETF Market, H1 2020

by Detlef Glow.

ETFs enjoyed inflows over the first six months of 2020 even as the economic and political developments over the course of the first half of the year were distinguished by the outbreak of COVID-19 and the resulting lockdowns of the leading economies. That said, March 2020 was one of the few months during which ETFs faced outflows as European investors switched to risk-off mode and respectively sold risky assets from their portfolios. Even as the economic outcome from the lockdowns is still unclear, investors returned to risky assets as governments and central banks started to stimulate the economies around the globe. This stimulus led to increasing stock markets and falling interest rates. That said, the inflows in ETFs could not offset the negative performance of underlying markets, which led to a decrease in assets under management from €870.0 bn as of December 31, 2019, to €830.0 bn at the end of June 2020. As stated above, the decrease of €40.0 bn for the first half of 2020 was driven by the negative performance of the underlying markets (-€57.4 bn), while the net inflows contributed €17.4 bn to the assets under management.

Graph 1: Assets Under Management in the European ETF Segment, December 31, 2000 – June 30, 2020 (Euro Millions)

Review of the European ETF Industry - H1-2020

Source: Refinitiv Lipper

With regard to the number of funds and the history of the European ETF market, it was not surprising equity funds (€543.9 bn) held the majority of assets, followed by bond funds (€250.5 bn), commodities products (€24.0 bn), alternative UCITS products (€5.9 bn), money market funds (€3.9 bn), mixed-assets funds (€1.6 bn), and “other” funds (€0.2 bn).

Graph 2: Market Share, Assets Under Management in the European ETF Segment by Asset Type, June 30, 2020

Source: Refinitiv Lipper

Fund Flows by Asset Type

As Graph 3 depicts, the estimated net inflows of €17.4 bn for the first half of 2020 are somewhat in line with the expectations derived from the yearly average flows (€36.2 bn) since ETFs were introduced in Europe in 2000. That said, these flows are far below the record flows of 2019 (+€106.7 bn). This trend may indicate that the European ETF industry could see another year with healthy inflows, but not a new record with regard to estimated net flows.

Graph 3: Historical Estimated Net Flows in the European ETF Segment, December 31, 2000 – June 30, 2020 (Euro Millions)

Source: Refinitiv Lipper

The inflows in ETFs over the first half of 2020 were driven by bond funds (+€16.4 bn), followed by money market ETFs (+€1.1 bn), commodities ETFs (+€1.0 bn), mixed-assets ETFs (+€0.2 bn), and ”other” ETFs (+€0.1 bn), while alternative UCITS ETFs (-€0.1 bn) and equity ETFs (-€1.4 bn) faced outflows.

This flow pattern drove the estimated overall net flows to positive €17.4 bn for the year 2020 so far.

Graph 4: Estimated Net Sales by Asset Type, January 1 – June 30, 2020 (Euro Millions)

Review of the European ETF Industry - H1-2020

Source: Refinitiv Lipper

A closer view of the flow trends during the first half of 2020 shows that the outbreak of the coronavirus and the following global lockdowns took their toll on equity and bond ETFs in March, while the extended quantitative easing (QE) programs—initiated by various central banks to cushion the economic aftermath of the global lockdowns—led to lower interest rates and increasing equity markets. As falling interest rates and a strong demand for bonds caused by central banks means that the prices for bonds may increase even further, investors returned to bond ETFs. Meanwhile, equity markets are still showing an increased volatility, which has led to a lack of investor confidence. As a result, equity ETFs are still facing estimated outflows for the year so far.

Graph 5: Estimated Monthly Net Flows for Bond, Commodities, and Equity ETFs, January 1 – June 30, 2020 (Euro Millions)

Source: Refinitiv Lipper

While money market ETFs showed higher inflows during the meltdown of equity markets in March, the flows reversed when investors returned to riskier assets. Conversely, the flow pattern for alternative UCITS ETFs, mixed-asset ETFs, and “other” ETFs were rather flat.

Graph 6: Monthly Estimated Net Sales by Asset Type, January 1 – June 30, 2020 (Euro Millions)

Source: Refinitiv Lipper

Assets Under Management by Lipper Global Classifications

In order to examine Lipper global classifications in further detail, the European ETF market was split into 169 different peer groups. The highest assets under management at the end of June were held by funds classified as Equity U.S. (€158.3 bn), followed by Equity Global (€87.9 bn), Equity Eurozone (€43.8 bn), Equity Europe (€43.0 bn), and Bond EUR Corporates (€39.4 bn). These five peer groups accounted for 44.87% of the overall assets under management in the European ETF segment, while the 10-top classifications by assets under management accounted for 57.91%.

Overall, 21 of the 169 peer groups each accounted for more than 1% of assets under management. In total, these 21 peer groups accounted for €611.6 bn, or 73.68%, of the overall assets under management. In addition, it was noteworthy that the rankings of the largest peer groups saw some movements in the single positions after the market turmoil caused by the COVID-19 crisis and the ongoing recovery. Even as positions 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. Nevertheless, these numbers showed assets under management in the European ETF industry continued to be highly concentrated.

Graph 7: Ten-Top Lipper Global Classifications by Assets Under Management, June 30, 2020 (Euro Millions)

Source: Refinitiv Lipper

The peer groups on the other side of the table showed some funds in the European ETF market are quite low in assets and risk being closed in the near future. They are obviously lacking investor interest and might, therefore, not be profitable for their respective fund promoters (Please read our report: “Is there a consolidation ahead in the European ETF industry?” for more details on this topic).

Graph 8: Ten Smallest Lipper Global Classifications by Assets Under Management, June 30, 2020 (Euro Millions)

Source: Refinitiv Lipper

Fund Flows by Lipper Global Classifications

The net inflows of the 10 best-selling Lipper classifications accounted for €30.5 bn. With regard to the overall sales for the first half of 2020, it was surprising that equity (+€13.9 bn) and bond funds (+€16.6 bn) showed roughly the same pattern in the table of the 10 best-selling peer groups with somewhat similar flows and an equal peer group count. Opposite to the overall trend, the best-selling Lipper global classification for June was Equity Global (+€4.9 bn), followed by Bond Global Corporates USD (+€4.9 bn) and Bond USD (+€3.3 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 often use ETFs to implement their market views and short-term asset allocation decisions. These products are made and, therefore, are easy to use, for these purposes.

Graph 9: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, January 1 – June 30, 2020 (Euro Millions)

Review of the European ETF Industry - H1-2020

Source: Refinitiv Lipper

On the other side of the table, the 10 peer groups with the highest estimated net outflows for the first half of 2020 accounted for €26.0 bn of outflows.

Assets Under Management by Promoters

A closer look at assets under management by promoter in the European ETF industry also showed high concentration, with only 20 of the 49 ETF promoters in Europe holding assets at or above €1.0 bn. The largest ETF promoter in Europe—iShares (€390.7 bn)—accounted for 47.07% of the overall assets under management, far ahead of the number-two promoter—Xtrackers (€87.4 bn)—and the number-three promoter—Lyxor ETF (including the AUM of ComStage) (€70.1 bn). (To learn more about the concentration of the European ETF market at the promoter level, please read our report: Spotlight on the concentration at the promoter level in the European ETF industry).

Graph 10: Ten-Top ETF Promoters by Assets Under Management, June 30, 2020 (Euro Millions)

Source: Refinitiv Lipper

The 10-top promoters accounted for 93.75% of the overall assets under management in the European ETF industry. This meant, in turn, the other 39 fund promoters registering at least one ETF for sale in Europe accounted for only 6.25% of the overall assets under management.

Fund Flows by Promoters

Since the European ETF market is highly concentrated, it was surprising that only four of the 10 largest promoters by assets under management were among the 10-top selling ETF promoters for June. iShares was the best-selling ETF promoter in Europe for the first half of 2020 (+€13.4 bn), ahead of Vanguard Group (+€3.9 bn) and Xtrackers (+€2.6 bn).

Graph 11: Ten Best-Selling ETF Promoters, January 1 – June 30, 2020 (Euro Millions)

Source: Refinitiv Lipper

The flows of the 10-top promoters accounted for estimated net inflows of €15.4 bn. Despite the overall flow trend over the course of the first half of 2020, it was clear that some of the 49 promoters (21) faced net outflows (-€9.8 bn in total) over the analyzed period.

Total Expense Ratios (TER)

Since costs are a major driver in the decision-making process of European ETF investors, it is worthwhile to have a look at the developments of the average TER of ETFs in Europe. As the market witnessed a pick-up in the average TER by two bps in 2017, the average TER in the European ETF segment felt by one bp to 0.33% between June 2019 and June 2020. This drop might be an indicator for the further ongoing competition, which is mainly driven by prices for the management of an ETF in the core asset classes, as the ETFs in these segments are like-for-like products while ETFs covering more exotic asset classes or niches are often not comparable to each other. 

Graph 12: Average TERs in the European ETF Segment (in %)

Review of the European ETF Industry - H1-2020

Source: Refinitiv Lipper

A closer view on the TER trends by asset type shows that commodities ETFs were the only asset type which witnessed an increasing average TER (up two bps from 0.39% to 0.41%), while the average TERs for alternative UCITS ETFs (0.42%), bond ETFs (0.32%), and equity ETFs (0.35%) went down one bp. Additionally, it is noteworthy that the average TERs for mixed-assets ETFs (0.46%), money market ETFs (0.13%), and “other” ETFs (0.37%) remained the same.

Graph 13: Average TER by Asset Type, June 30, 2020 (in %)

Source: Refinitiv Lipper

A Closer View of the Usage of Different Index Replication Methods

A closer view of the usage of different index replication methods shows that swap-based replication is losing further traction. The market share of this index replication method shrunk from 16.64% at the end of December 2019 to 14.95% at the end of June 2020. Conversely, optimized replication methods increased their popularity with European investors as their market share increased from 39.81% (December 31, 2019) to 42.48% (June 30, 2020).

As the shifts in market share could have been caused by market movements, one needs to look at the underlying flow trends to identify the drivers of the shifts. That said, ETFs using a swap-based index replication methodology faced outflows of €9.8 bn over the course of the first half of 2020, while ETFs using full index replication (+€4.3 bn) or an optimized index replication method (+€22.2 bn) enjoyed estimated net inflows. These flow numbers show that investors in Europe prefer full replication and optimized replication methods over the use of derivatives such as swaps when it comes to the replication of indices.

Graph 14: Market Share (%) of Index Replication Methods by Assets Under Management

Review of the European ETF Industry - H1-2020

Source: Refinitiv Lipper

That said, it is not surprising that we can observe an increase of the popularity of optimized replication methods, as these methods are often used in the replication of bond indices. This means that the expected increase in demand for bond ETFs will drive the market share of optimized replication methods up further in the future.

The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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