Morningstar predicts European ETFs to hit EUR1 trillion in assets before end of 2020

ETF blocks

Morningstar has published its third quarter ETF flows report for Europe which finds that European ETFs attracted inflows of EUR28.8 billion in the third quarter of 2020 after EUR33.5 billion in the second quarter.

Assets under management across Europe grew by 5 per cent to EUR948 billion from EUR903 billion in the second quarter. Equity ETFs netted EUR17.1 billion as risk-on sentiment dominated in the summer months, Morningstar comments.

ESG ETFs saw a big rise in demand from 19 per cent in the second quarter, to 29 per cent of the flows in the third quarter. Assets in ESG ETFs already account for 5.9 per cent of total assets in ETFs in Europe, according to Morningstar.

iShares topped the ETF providers' league with EUR10.4 billion of inflows and industry giant Vanguard has posted two slightly negative flow quarters in a row.

Morningstar comments that this remains a time of heightened uncertainty, but the market seems poised to hit EUR1 trillion in assets before the year is out.

Strategic-beta ETFs continued on their troubled path, shedding EUR0.44 billion following on the EUR 1 billion of outflows in the second quarter. Assets in strategic-beta ETFs remained static at EUR61.7 billion and now represent 6.5 per cent of total assets in ETFs, down from 6.8 per cent in the second quarter, Morningstar writes.

Thematic ETFs raked in EUR2.2 billion, up from EUR1.6 billion in the second quarter. Assets in Thematic ETFs now sit at a record-high of EUR15.2 billion, up from EUR8.5 billion at the turn of the year.

Equity ETFs had inflows of EUR17.1 billion in the third quarter, strongly up from EUR4.2 billion in the second. Morningstar comments that investors found it difficult to ignore the rise in equity markets through the summer. This was a time when positive sentiment built on the gradual lifting of lockdown restrictions in most countries.

Assets in equity ETFs have increased to EUR575.7 billion from EUR544.6 billion in the second quarter.

The analysis of equity flows by Morningstar Category shows a strong preference for allocation to broad large-cap developed markets. The top flow-gathering category in the third quarter was Other Equity with EUR4.45 billion. 

“This category is largely made up of share classes of ETFs that incorporate a currency hedge, and so one must dig deeper to understand where the actual flows went. Looking at the individual items in the Other Equity category we find that most of the money was directed to US, European, and Global large-cap exposures. These three also make the top five in their standard - that is, with no currency hedge - versions. Elsewhere, investors poured EUR1.05 billion into technology sector ETFs. This category includes ETFs that tap into themes such as cloud computing, automation and robotics, artificial intelligence, and digital security – essentially anything that chimes with the new way of working because of the Covid-19 pandemic.”

Morningstar also comments that in terms of individual funds, “it may come as a surprise to some seeing the likes of iShares Core S&P 500 or Vanguard S&P 500 in the bottom 10 given that US large-cap equity was strongly favoured during the period.

“We have known for some time that in the case of US equities, the synthetic ETF structure has an edge in performance over physical replication as it avoids the payment of withholding tax on dividends. iShares Core S&P 500 and Vanguard S&P 500 are both physical ETFs. Some investors in these funds have switched to synthetic competitors. In fact, in the case of iShares, investors in its physical ETF may have switched to the iShares S&P 500 Swap UCITS ETF launched in late September.”

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