The European ETF industry enjoyed inflows over the course of June. These inflows occurred in a somewhat unstable but positive market environment in which some asset classes showed positive results. Meanwhile, others performed negatively over the course of the month. Market sentiment was still driven by hopes that central banks, especially the U.S. Federal Reserve, may have reached the last phase of their fight against high and increasing inflation rates and may, therefore, start to keep interest rates at least stable quite soon. Some investors already expect that there might be room for decreasing interest rates later this year. Nevertheless, there are still some concerns about geopolitical tensions and the normalization of disrupted supply chains, as well as a possible recession in the U.S. and other major economies around the globe. These fears are raised by inverted yield curves which are seen as an early indicator for a possible recession.
The performance of the underlying markets led in conjunction with the estimated net inflows to increasing assets under management (from €1,369.0 bn as of May 31, 2023, to €1,407.7 bn at the end of June). At a closer look, the increase in assets under management of €38.6 bn for June was driven by the performance of the underlying markets (+€27.2 bn), while the estimated net inflows contributed (+€11.5 bn) to the growth in assets under management.
That said, a view of historical numbers shows that the assets under management in the European ETF industry have reached a new all-time high (€1,407.7 bn) at the end of June 2023. This new all-time high was not the only record broken over the course of June. The assets under management for bond funds (€337.1 bn) also hit an all-time high, as did the assets under management in equity (€1,014.0 bn) and money market ETFs (€16.2 bn).
I am pretty sure that we will talk about a new all-time-high soon since the overall assets under management in the European ETF industry are set to surpass the €1.5 tr milestone in July or August.
From my point of view the big question which asset type will reach the next milestone faster—bond ETFs (€0.50 tr) or equity ETFs (€1.5 tr)?
Assets Under Management
Graph 1 Assets Under Management in the European ETF Segment by Asset Type, January 1, 2000 – June 30, 2023 (Euro Millions)
Source: LSEG Lipper
As for the overall structure of the European ETF industry, it was not surprising equity funds (€1,014.0 bn) held the majority of assets, followed by bond funds (€337.1 bn), commodities products (€31.3 bn), money market products (€16.2 bn), alternative UCITS products (€5.6 bn), and mixed-assets funds (€3.6 bn).
Graph 2: Market Share, Assets Under Management in the European ETF Segment by Asset Type, June 30, 2023
Source: LSEG Lipper
Fund Flows by Asset Type
The European ETF industry enjoyed estimated net inflows (+€70.2 bn) over the course of the first six months of 2023. These flows were way above the annual average of €49.4 bn.
Graph 3: Estimated Net Sales by Asset Type, January 1, 2000 – June 30, 2023 (Euro Millions)
Source: LSEG Lipper
Even as former research reports indicated that there is no January effect with regard to the fund flow trends in Europe, January 2023 was the strongest month for estimated net inflows into ETFs in Europe for the year so far.
Graph 4: Monthly Estimated Net Sales by Asset Type, January 1 – June 30, 2023 (Euro Millions)
Source: LSEG Lipper
Given the current market environment it was not surprising that the inflows in the European ETF industry for June were driven by equity ETFs (+€36.2 bn), followed by bond ETFs (+€30.5 bn), money market ETFs (+€3.1 bn), mixed-assets ETFs (+€0.4 bn), and commodities ETFs (+€0.1 bn). On the other side of the table, alternative UCITS ETFs (-€0.2 bn) were the only asset type which faced outflows over the first half of the year.
Graph 5: Estimated Net Sales by Asset Type, January 1 – June 30, 2023 (Euro Millions)
Source: LSEG Lipper
As to be expected, the fund flow trends of the three major asset types (bonds, equities, and commodities) in the European ETF industry followed somewhat the overall fund-flows picture. That said, it was surprising to see that bond and equities ETFs had the same level of inflows over the course of January. As graph 6 shows, even as commodities are considered as one of the major asset types in the European ETF industry, the flows into these products are rather shy.
Graph 6: Monthly and Cumulative Estimated Net Sales by Asset Type, January 1 – June 30, 2023 (Euro Millions)
Source: LSEG Lipper
The flows for the other asset types over the course of the first six months of 2023 show a rather mixed picture, with money market products dominating the flows compared to mixed-assets and alternatives ETFs. It is a bit surprising to see that the flows into money market ETFs are not higher, given the inverted yield curve in the Eurozone and the other major economies.
Graph 7: Monthly and Cumulative Estimated Net Sales by Asset Type, January 1 – June 30, 2023 (Euro
Source: LSEG Lipper
Assets Under Management by Lipper Global Classifications
In order to examine the European ETF markets in further detail, a review of the Lipper global classifications will help to show more insights on the structure and the concentration of assets within the European ETF industry. At the end of June 2023, the European ETF market was split into 164 different peer groups. The highest assets under management at the end of June were held by funds classified as Equity U.S. (€305.2 bn), followed by Equity Global (€214.7 bn), Equity Europe (€71.2 bn), Equity Emerging Markets Global (€67.2 bn), and Equity Eurozone (€51.0 bn). These five peer groups accounted for 50.39% of the overall assets under management in the European ETF segment, while the 10-top classifications by assets under management accounted for 62.45%.
Overall, 17 of the 164 peer groups each accounted for more than 1% of assets under management. In total, these 17 peer groups accounted for €1,011.7 bn, or 71.87%, of the overall assets under management. 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 following 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. Nevertheless, these numbers showed assets under management by Lipper global classifications continued to be highly concentrated in the European ETF industry.
Graph 8: Ten-Top Lipper Global Classifications by Assets Under Management, June 30, 2023 (Euro Millions)
Source: LSEG 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 their constituents 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 9: Ten Smallest Lipper Global Classifications by Assets Under Management, June 30, 2023 (Euro Millions)
Source: LSEG Lipper
Fund Flows by Lipper Global Classifications
The net inflows of the 10 best-selling Lipper classifications over the course of the first six months of 2023 accounted for €51.7 bn. In line with the overall sales trend for the first half of 2023, equity peer groups (+€31.0 bn) gathered the majority of flows by asset type on the table of the 10 best-selling peer groups by estimated net inflows. Given the overall fund flow trend in the European ETF industry, it was not surprising that Equity Global (+€14.5 bn) was the best-selling Lipper global classification over the course of the first six months of 2023. It was followed by Equity Emerging Markets Global (+€8.8 bn) and Bond EUR Corporates (+€8.2 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 10: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, June 2023 (Euro Millions)
Source: LSEG Lipper
On the other side of the table, the 10 peer groups with the highest estimated net outflows for the first half of 2023 accounted for €8.5 bn in outflows.
Equity Sector Energy (-€1.5 bn) was the Lipper Global Classification with the highest outflows for the first six months of 2023. The category was bettered by Bond EUR Inflation Linked (-€1.0 bn) and Equity Canada (-€1.0 bn).
Assets Under Management by Promoters
A closer look at assets under management by promoters in the European ETF industry also showed high concentration, with only 24 of the 50 ETF promoters in Europe holding assets at or above €1.0 bn. The largest ETF promoter in Europe—iShares (€647.1 bn)—accounted for 45.97% of the overall assets under management, far ahead of the number-two promoter—Amundi ETF (€186.1 bn)—and the number-three promoter—Xtrackers (€141.5 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 11: Ten-Top ETF Promoters by Assets Under Management, June 30, 2023 (Euro Millions)
Source: LSEG Lipper
The 10-top promoters accounted for 93.53% of the overall assets under management in the European ETF industry. This meant, in turn, the other 40 fund promoters registering at least one ETF for sale in Europe accounted for only 6.47% of the overall assets under management.
Fund Flows by Promoters
Since the European ETF market is highly concentrated with regard to the assets under management by promoter, it was not surprising that seven of the 10 largest promoters by assets under management were among the 10-top selling ETF promoters for the first six months of 2023. iShares was the best-selling ETF promoter in Europe for the first half of 2023 (+€33.5 bn), ahead of Xtrackers (+€8.7 bn) and Vanguard (+€8.2 bn).
Graph 12: Ten Best-Selling ETF Promoters, January 1 – June 30, 2023 (Euro Millions)
Source: LSEG Lipper
The flows of the 10-top promoters accounted for estimated net inflows of €12.7 bn. As for the overall flow trend in June, it was clear that some of the 50 promoters (18) faced net outflows (-€1.6 bn in total) over the course of the month.
Assets Under Management by ETF Domicile
An analysis of assets under management by ETF domicile showed an even higher concentration of assets under management than at the promoter level. Ireland was by far the largest ETF domicile by assets under management (€970.5 bn). It was followed by Luxembourg (€294.2 bn) and Germany (€58.1 bn). It is noteworthy that Ireland and Luxembourg have changed their positions as largest domiciles compared to the overall European fund industry since Luxembourg is the by far the largest fund domicile in Europe.
Graph 13: Assets Under Management by ETF Domicile, June 30, 2023 (Euro Millions)
Source: LSEG Lipper
The dominance of Ireland as largest ETF domicile by assets under management is even better shown in graph 14. This graph also shows that Ireland and Luxembourg have a combined market share of 89.85%, which means that the 10 other ETF domiciles have a combined market share of only 10.15%.
Graph 14: Market Share of ETF Domiciles by Assets Under Management, June 30, 2023 (Euro Millions)
Source: LSEG Lipper
The main reason for the success of Ireland compared to Luxembourg can be seen in the taxation agreement between Ireland and the U.S. which gives all equity ETFs domiciled in Ireland an advantage regarding the replication of NR and TR indices. Another reason for the dominance of Ireland might be the dominance of Anglo-Saxon asset managers in the European ETF industry since those managers may prefer a fund domicile with a similar corporate culture and work language as their home country. Nevertheless, we see an increasing amount of Continental European asset managers transferring their equity ETFs from Luxembourg to Ireland to take advantage of the taxation agreement between Ireland and the U.S.
On the other hand, Luxembourg might become the fund domicile of choice for fund promoters that want to launch ETF share classes in addition to their existing mutual funds share classes because it seems like Luxembourg might have a more product-friendly regulation model with regard to the naming convention for these kind of funds.
Assets Under Management by SFDR Article
Given the fact that ESG-related investment strategies are seen as a natural habitat for active fund managers, it is not surprising that article 6 products are dominating the European ETF landscape by number of products and assets under management.
Looking more closely, 2,341 primary and convenience share classes (65.94% of the overall number of available share classes) were classified as article 6 products at the end of June 2023; 1,119 share classes (31.52%) were listed as article 8 products; and only 65 share classes (1.83%) were listed as article 9 products.
Given that some European countries are not members of the EU and, therefore, don’t have to comply with the SFDR regulation, it is no surprise that some products and their share classes (25) do not report an SFDR status.
The relatively low number of article 9 compliant products in the European ETF industry is no surprise since a high number of products got reclassified from article 9 to article 8 after the regulatory technical standards (RTS) have been introduced in Q4 2022. The same was true for a number of article 8 products which got reclassified to article 6 of the SFDR.
This might be subject to change in the future because the latest guidance from the European Commission eased the stance regarding eligible strategies for article 9 compliant products. Therefore, it is expected that the number of article 9 compliant ETFs will rise in the future.
Graph 15: Market Share SFDR Status by ETF Count, June 30, 2023
Source: LSEG Lipper
The picture for market share by assets under management looks somewhat similar as the picture for the market share by share class count. Article 6 compliant ETFs account for €1.089.5 bn, or 77.40%, of the overall assets under management, while article 8 compliant ETFs account for €306.7 bn (21.79%), and article 9 compliant ETFs accounted for €8.5 bn (0.60%). ETFs with no reported SFDR status accounted for €3.0 bn (0.21%).
Graph 16: Market Share SFDR Status by Assets Under Management, June 30, 2023 (Euro Millions)
Source: LSEG Lipper
ETF Flows by SFDR Article
Given the market structure regarding the SFDR status of ETFs in Europe it is no surprise that article 6 compliant products had, with the exception of May 2023, the highest estimated net inflows in a month-by-month comparison.
Graph 17: Monthly Estimated Net Flows by SFDR Status, January 1 – June 30, 2023 (Euro Millions)
Source: LSEG Lipper
In more detail, SFDR article 6 compliant ETFs (+€45.7 bn) enjoyed the highest inflows over the course of the first six months of 2023. They were followed by article 8 compliant ETFs (+€21.0 bn) and article 9 compliant ETFs (+€1.6 bn). ETFs which don’t report their SFDR status (+€2.0 bn) enjoyed higher estimated net inflows than article 9 compliant products. This flow pattern is no surprise given the fact that some precious metals funds, which are domiciled outside the EU, enjoyed healthy inflows over the course of the first half of 2023.
Graph 18: Estimated Net Flows by SFDR Status, January 1 – June 30, 2023 (Euro Millions)
Source: LSEG Lipper
ETF Launches and Closures – H1 2023
A general view of the activity of ETF promoters when it comes to the launch of new products and the closure of ETFs which haven’t been attracting enough investor interest shows that ETF promoters have only launched 80 new ETFs (primary share classes) over the course of the first half of 2023. Conversely, 62 ETFs have been closed over the same period, which means that the total number of ETFs (primary share classes) has increased by only 18 products over the course of the first six months of 2023.
Overall, 152 (80 primary and 72 convenience) new share classes were launched over the course of 2023 year to date. Out of these 152 new share classes, 95 (62 primaries) were equity products, 49 (11 primaries) were bond products, 3 three (two primaries) were commodities products, four (four primaries) were alternatives, and one (one primary) was a mixed-assets product.
On the other side of the table, a total of 83 (62 primary and 21 convenience) share classes have been closed over the course of the first six months of 2023. Out of these 83 merged or liquidated share classes, 59 (43 primaries) were equity products, 15 (11 primaries) were bond products, five (four primaries) were commodities products, and four (four primaries) were alternatives.
Graph 19: Net Number of ETF Launches (Primary Share Classes) by Calendar Year and Cumulative Number of Primary Share Classes, January 1, 2000 – June 30, 2023
Source: LSEG Lipper
From my point of view, the lack of newly launched ETFs is one consequence of tighter monetary policies introduced by central banks on both sides of the pond. Another consequence is that seed money—which is needed by literally all ETF promoters—faded away when interest rates moved up. This is because central banks and other institutions starting to pay interest rates meant that investment banks got a decent predictable return when parking their cash in central bank or other accounts. In turn, this means the risk appetite of investment banks decreased since they no longer must search for alternative ways to earn an income on their free cash. As a side effect, increasing interest rates make borrowing money as seed money more expensive, which has taken this option off the table for ETF promoters as well.
Why is seed money needed? Seed money gives an ETF a decent asset base so that it becomes attractive for institutional and other professional investors who may face restrictions on the size of ownership they can hold in single products. Conversely, seed money gets removed (in some cases step by step) once the respective ETF has reached a given target size.
Another reason why ETF promoters might not have launched so many products year to date might be the current general market environment since no promoter wants to launch new products shortly before a market downturn. Therefore, the ongoing fears over possible recessions in the leading global economies may hold ETF promoters back from launching new products.
That said, from my point of view it seems like the current restraint from European ETF promoters when it comes to launching new products is simply driven by the current market environment and has nothing to do with a possible lack of innovation or a maturing industry. Rather, the opposite is true. I am expecting a high number of new ETFs to be launched once the outlook for the markets becomes clearer because I have learned from conversations with ETF promoters that they have a lot of ideas to enhance their current ETF offerings.
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 Refinitiv Lipper or LSEG.
