It’s fair to say that 2023 was a challenging year for portfolio managers around the globe since the markets were driven by a number of different factors and unpredictable incidents. Each of these could have caused a major market downturn on their own. First of all, there were a lot of geopolitical tensions around the globe beside the war in Ukraine, which showed that democratic states might be more vulnerable than one may think. The concerns of European investors increased towards the end of 2023, since the actions taken by the Houthi rebels in the Red Sea have the power to disrupt the still vulnerable delivery chains in Europe and other parts of the world.
Also, there were economic factors which burdened the expectations of investors, such as China’s failure to meet the growth expectations of investors when its economy was reopened after the end of the country’s zero-COVID strategy. Talking about China, the credit crisis in the Chinese real estate sector later in the year was another factor that could have caused a market downturn if it wasn’t handled well by the Chinese government. Nevertheless, investors are still cautious about investments in China.
After the meltdown in the bond segment during the interest hiking cycle over the course of 2022, investors hoped that the measures taken by central banks would bring down inflation and lead to falling interest rates. This assumption went against the hawkish statements of central banks around the globe for the first 10 months of 2023. The relatively high interest rates raised fears that some major economies such as the U.S. would face a hard landing. In addition to this, some investors might have recalled bad memories when the Silicon Valley Bank and two other regional banks were closed in early March 2023. These feelings might have become worse when Credit Suisse struggled later in the month and was finally taken over by UBS by governmental order.
Nevertheless, investors hope that central banks—especially the U.S. Federal Reserve—have reached the last phase of their fight against high and further increasing inflation rates given their rather dovish statements during/after the respective central bank meetings in December. With regard to this, some investors already expected that there might be room for decreasing interest rates early next year, which might be reflected by the estimated inflows in bond ETFs. Despite the dovish statements by the central banks, these estimates might be under scrutiny since inflation in the major economies seems to be more sticky than expected and central banks are held responsible to reach their inflation targets. This could mean that the expected rate cuts start later than investors expect.
In addition, there were some concerns about the possibility of a recession in the U.S. and other major economies around the globe. These fears have been raised by long-term inverted yield curves, which are seen as an early indicator for a possible recession. The normalization of the inverted yield curves might be another short-term challenge for the bond markets.
On the other hand, the spectacular performance of the so-called Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) drove the U.S. markets up. The stellar performance of these stocks might have reminded some investors of the performance of some stocks before the burst of the so-called “dot.com bubble.” As a result, many investors might have been caught between fear and greed when looking at the U.S. equity markets.
That said, some major equity indices reach new all-time high values at the end of year 2023 despite all the headwinds over the course of the year.
The performance of the underlying markets led, in combination with the estimated net inflows, to increasing assets under management (from €1,242.5 bn as of December 31, 2022, to a new all-time high of €1,563.5 bn at the end of December). At a closer look, the increase in assets under management of €321.0 bn for 2023 was driven by the performance of the underlying markets (+€165.4 bn), while the estimated net inflows contributed (+€155.6 bn) to the increase in assets under management.
Graph 1: Assets Under Management in the European ETF Industry (January 1, 2000 – December 31, 2023)
Source: LSEG Lipper
Assets Under Management
As for the overall structure of the European ETF industry, it was not surprising equity funds (€1,127.8 bn) held the majority of assets, followed by bond funds (€369.0 bn), commodities products (€32.3 bn), money market products (€23.9 bn), alternatives products (€6.8 bn), and mixed-assets funds (€3.8 bn).
It is noteworthy that the assets under management in bond, equities, and money market ETFs reached a new all-time high at the end of December 2023.
Graph 2: Market Share, Assets Under Management in the European ETF Segment by Asset Type, December 31, 2023
Source: LSEG Lipper
Assets Under Management by SFDR Article
Since responsible investment strategies are seen as a domain for active asset managers it is not surprising that ETFs which fall under article 8 or article 9 of the Sustainable Finance Disclosure Regulation (SFDR) account for the minority of the assets under management in the European ETF industry. In addition, one needs to bear in mind that ETFs are the products of choice for investors who want to implement broad market exposure within their portfolios. The exposure is still linked to plain vanilla indices such as the MSCI World index or the S&P 500. With regard to this, it is not surprising that ETFs falling under article 6 of the SFDR held the majority of the assets under management in the European ETF industry.
In more detail, SFDR article 6 ETFs account for €1,188.9 bn, or 76.04%, of the overall assets under management in the European ETF industry, while SFDR article 8 ETFs held €355.4 bn, or 22.73%, of the assets under management and SFDR article 9 ETFs €13.8 bn, or 0.88%, of the overall assets under management. Given the fact that this report also covers ETFs which are not domiciled or registered for sales within the EU, it is no surprise that €5.5 bn, or 0.35%, of the assets under management are not classified under any SFDR article.
Graph 3: Market Share, Assets Under Management in the European ETF Industry by SFDR Article, December 31, 2023
Source: LSEG Lipper
With regard to the above, one needs to bear in mind there has been a lot of confusion around the classification of ETFs under the SFDR. After the EU Commission clarified their stance on the eligibility of ETFs which follow the highest EU climate benchmark standards (Paris-Aligned- Benchmarks [PAB] and Climate Transition Benchmarks [CTB]), some ETF promoters started to reclassify their respective ETFs to article 8 or 9.
We expect that the market share of assets under management of article 8 and 9 ETFs will increase over time, since more and more investors will change the benchmarks of their portfolio from conventional plain vanilla benchmarks to benchmarks which use sustainable investment credentials to determine their constituents.
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 lead to more insights on the structure and concentration of assets within the European ETF industry. At the end of December 2023, the European ETF market was split into 168 different peer groups. The highest assets under management at the end of December were held by funds classified as Equity U.S. (€356.8 bn), followed by Equity Global (€249.7 bn), Equity Europe (€77.1 bn), Equity Emerging Markets Global (€70.7 bn), and Equity Eurozone (€54.5 bn). These five peer groups accounted for 51.73% of the overall assets under management in the European ETF segment, while the 10-top classifications by assets under management accounted for 63.60%.
Overall, 18 of the 168 peer groups each accounted for more than 1% of assets under management. In total, these 18 peer groups accounted for €1,157.5 bn, or 74.03%, 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. That said, the ranking changes at the top of the league table which happened during the COVID-19 pandemic have not reversed since and now represent the new normal. Nevertheless, these numbers showed assets under management by Lipper global classifications continued to be highly concentrated in the European ETF industry.
Graph 4: Ten-Top Lipper Global Classifications by Assets Under Management, December 31, 2023 (Euro Millions)
Source: LSEG Lipper
The peer groups on the other side of the table showed some product offerings in the European ETF market are quite low in assets under management and the constituents of the respective Lipper classifications risk being closed in the near future. They are obviously lacking investor interest and might, therefore, not be profitable for their respective ETF promoters (Please read our report: “Is there a consolidation ahead in the European ETF industry?” for more details on this topic).
Graph 5: Ten Smallest Lipper Global Classifications by Assets Under Management, December 31, 2023 (Euro Millions)
Source: LSEG Lipper
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 25 of the 55 ETF promoters in Europe holding assets at or above €1.0 bn. The largest ETF promoter in Europe—iShares (€709.4 bn)—accounted for 45.37% of the overall assets under management, far ahead of the number-two promoter—Amundi ETF (€207.4 bn)—and the number-three promoter—Xtrackers (€162.3 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 6: Ten-Top ETF Promoters by Assets Under Management, December 31, 2023 (Euro Millions)
Source: LSEG Lipper
The 10-top promoters accounted for 93.61% of the overall assets under management in the European ETF industry. This meant, in turn, the other 45 fund promoters registering at least one ETF for sale in Europe accounted for only 6.39% of the overall assets under management.
ETF Fund Flows Trends – 2023
The European ETF industry enjoyed healthy net inflows of €155.6 bn over the course of 2023. These flows marked the second highest inflows into ETFs in Europe since the inception of these products in the year 2000.
Graph 7 shows that ETFs enjoyed inflows in every single month over the year 2023. While January (+€18.9 bn) was the month with the highest monthly inflows into ETFs over the course of 2023, May 2023 was the month with the lowest inflows into ETFs in Europe (+€7.7 bn).
Graph 7: Monthly Estimated Net Flows in ETFs in Europe, January 1, 2023 – December 31, 2023 (Euro Millions)
Source: LSEG Lipper
The estimated net inflows of €155.6 bn were far above the average annual flows since the inception of ETFs in Europe (+€53.5 bn). As mentioned before, the European ETF industry missed a new record for estimated net inflows by a small margin despite the strong inflows into over the course of the fourth quarter 2023. Nevertheless, 2023 was the second-best year on record with regard to the estimated net flows for the European ETF industry.
Graph 8: Annual Estimated Net Flows in ETFs in Europe, January 1, 2000 – December 31, 2023 (Euro Millions)
Source: LSEG Lipper
ETF Flows by Asset Type
The inflows in the European ETF industry for 2023 were driven by equity ETFs (+€92.7 bn), followed by bond ETFs (+€53.5 bn), money market ETFs (+€10.3 bn), and mixed-assets ETFs (+€0.6 bn). On the other side of the table, commodities ETFs (-€0.3 bn) and alternatives ETFs (-€1.2 bn) faced outflows for 2023.
Graph 9: Estimated Net Sales by Asset Type, January 1 – December 31, 2023 (Euro Millions)
Source: LSEG Lipper
ETF Flows by SFDR Article
SFDR article 6 ETFs (+€107.3 bn) enjoyed the highest inflows over the course of 2023. The category was followed by article 8 ETFs (+€43.1 bn), article 9 ETFs (+€2.7 bn), and “not reporting ETFs” (+€2.1 bn).
The estimated fund flows by SFDR article show a clear preference of European investors for SFDR article 6 ETFs. This trend might become a subject of change once European investors start to measure the performance of their portfolios against benchmarks which use sustainability credentials to determine their constituents.
Graph 10: Estimated Net Sales by Asset Type, December 2023 (Euro Millions)
Source: LSEG Lipper
Even as all kind of ETFs enjoyed estimated net inflows over the course of 2023, it might be noteworthy that only SFDR article 6 and article 8 ETFs enjoyed inflows in every single month of the year, while SFDR article 9 ETFs faced outflows in June and December, “not reporting ETFs” faced outflows in June, August, September, and November 2023.
ETF Flows by Lipper Global Classifications
The net inflows of the 10 best-selling Lipper classifications over the course of 2023 accounted for €121.1 bn. In line with the overall sales trend for December, equity peer groups (+€81.2 bn) gathered the majority of flows by asset type on the table of the 10 best-selling peer groups by estimated net inflows for 2023. Given the overall fund flow trend in the European ETF industry, it was not surprising that Equity Global (+€34.5 bn) was the best-selling Lipper global classification for 2023. It was followed by Equity U.S. (+€30.1 bn) and Equity Emerging Markets Global (+€10.9 bn).
These numbers showed the European ETF segment is also highly concentrated when it comes to fund flows by Lipper Global Classification. 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 11: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales – 2023 (Euro Millions)
Source: LSEG Lipper
On the other side of the table, the 10 peer groups with the highest estimated net outflows for 2023 accounted for €13.1 bn in outflows.
Equity Sector Financials (-€2.8 bn) was the Lipper Global Classification with the highest outflows for the year. The category was bettered by Bond EUR Inflation Linked (-€1.6 bn) and Equity Sector Energy (-€1.3 bn).
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 nine of the 10 largest promoters by assets under management were among the 10-top selling ETF promoters for 2023. iShares was the best-selling ETF promoter in Europe for the year (+€67.1 bn), ahead of Xtrackers (+€22.5 bn) and Vanguard (+€18.5 bn).
Graph 12: Ten Best-Selling ETF Promoters, 2023 (Euro Millions)
Source: LSEG Lipper
The flows of the 10-top promoters accounted for estimated net inflows of €148.7 bn. As for the overall flow trend over the course of 2023, it was clear that some of the 55 promoters (14) faced estimated net outflows (-€2.4 bn in total) over the course of the year.
These outflows may raise further concerns about a possible consolidation in the European ETF industry since the respective promoters are, with exception of UBS ETF, seen as small ETF promoters which may not be profitable at all and may therefore be acquisition targets for larger European ETF promoters or asset managers who want to enter the European ETF industry.
Fees and Expenses
The average total expense ratio (TER) of ETFs (0.33%) did not fall over the course of 2023 even as some ETF promoters made significant fee cuts. The main reason for this can be seen in the fact that these fee cuts were only offered for single ETFs and not for the whole product range of the respective promoters. In addition to this, one needs to bear in mind that the trend toward the launch of non-plain vanilla ETFs does in general not support declining average TERs. This is because these products have, in general, an on average higher TER than ETFs which are based on a plain vanilla index.
Graph 12: Average Total Expense Ratios in the European ETF Industry 2019 – 2023 (in %)
Source: LSEG Lipper
Average Total Expense Ratios by Asset Type
As to be expected, ETFs using an alternative investment strategy (0.45%) had the highest total expense ratio (TER) in the European ETF industry in 2023, while money market ETFs (0.15%) had the lowest TER in 2023. Given their investment objective it is no surprise that mixed-assets ETFs (0.41%) had an above average TER. The same is true for commodities ETFs (0.40%).
Given the media coverage on the fee cuts for some equity ETFs in Europe one might be surprised to witness that equity ETFs (0.37%) have an average TER which is above the average TER of all ETFs. As mentioned above, this is caused by the fact that the fee cuts impact only a limited number of ETFs. In addition to this, launching ETFs with a non-plain vanilla investment objective may rather lead to increasing TERs, since ETFs have in general an on average higher TER than their plain vanilla peers.
Since bond ETFs are in general cheaper than equity ETFs it is no surprise that the average TER (0.20%) of these products is below the overall average. Like for equity ETFs, we witness a trend toward the launch of ETFs with non-plain vanilla bond strategies. These launches may cause increasing average TERs for bond ETFs in the future.
Graph 13: Average Total Expense Ratios by Asset Type, 2023 (in %)
Source: LSEG Lipper
