Two new pieces of research show that fixed income ETF demand across Europe is on the increase.
Demand for ETFs in Europe overall is growing and among the drivers of this growth are the increasing appeal of using ETFs for portfolio diversification, their cost effectiveness, and their versatility in time-specific or niche exposures says global research and consulting firm Cerulli Associates.
Demand from institutional investors has proven to be another key factor in their continued popularity. The assets of ETFs domiciled in Europe rose at a compound annual growth rate of 16 per cent from 2012 to 2018, despite contracting last year when several European equity markets moved into negative territory.
The new data from Cerulli reflects research undertaken by Tabula Investment Management, a specialist European fixed income ETF provider. Tabula’s research finds that 32 per cent of professional investors – from wealth managers to pensions funds – plan to increase their exposure to fixed income ETFs over the next three years.
Cerulli’s findings corroborate this data, showing that in the first quarter of 2019, fixed income ETFs registered record inflows, and net flows for fixed income ETFs in Europe reached EUR 18.5 billion (USD 20.2 billion) during that period.
According to Tabula, within professional investors’ fixed income portfolios the allocation to ETFs is also set to rise, with the number of investors with 10 per cent or more of their fixed income exposure in ETFs more than doubling from 16 per cent to 33 per cent in the same period. This brings the average amount invested up to 12 per cent by 2022, compared to 7 per cent today, Tabula says.
This is despite 72 per cent of wealth managers and institutional investors saying that the environment for trading fixed income has not seen notable progress in the last three years, with 47 per cent saying it has actually become harder. In particular, discovering Euro-denominated fixed income investments that deliver satisfactory levels of yield is a challenge for 63 per cent of investors, the Tabula survey says.
“As investor appetite for fixed income grows, so does the demand for innovation in fixed income ETFs as a means of broadening accessing to the asset class at a low cost," says Tabula CEO Michael John Lytle (pictured).
“At Tabula, we want to help drive this process. At a time when negative Euro yields are driving many investors to increase their high yield allocations in their search for yield, we offer solutions that allow investors to access yield scaled up a mainly investment grade portfolio, in order to generate returns comparable to high yield. Meanwhile, our ETFs have minimal interest rate exposure, helping to address concerns about rising rates.”
Both Cerulli and Tabula’s research reflects a shared desire of wealth managers and investors to make use of ETFs and smart beta products. Tabula’s study finds that more than half (51 per cent) of investors are hopeful that the level of smart beta and innovation used in the fixed income ETF sector will increase over the next three years. While 38.9 per cent of the European asset managers that Cerulli surveyed expect smart beta products to grow rapidly in the institutional space and a further 44.4 per cent anticipate moderate growth.
Fabrizio Zumbo, associate director, European asset management research, says: “ETF issuers are offering more innovative and niche products, and financial advisors are seeking to fully capitalise on ETFs’ wrapper potential.
“We expect demand for ETFs from advisers to rise in tandem with the increasing adoption of ETFs as building blocks for portfolio construction. Direct-to-consumer platforms and robo-advisers are also set to boost demand for ETFs among retail clients.”
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