In the first nine months of the year, index-trackers saw inflows of €52.8bn, according to Morningstar data. Flows are up a staggering 59% compared to the same period last year, when ETF inflows were already at a record high.
Net inflows were at their highest during the first months of the year, but unlike flows into active funds, they have remained positive since. Many active asset managers had expected that those investors who had been increasing their exposure to index-trackers in the past years would revert course once equity markets became more volatile.
But the opposite seems to have happened: while active equity funds sold off heavily in September, European large cap equity ETFs alone registered €1.6bn in net inflows.
Surprising or not?
This may look surprising at first, since intra-day tradable ETFs are easier to exit than actively managed funds and are often held for tactical reasons. But over the past years, many investors have adopted a so-called core-satellite approach, whereby ETFs form the strategic core of their often benchmark-driven investment portfolios. Active funds then complement the portfolios as satellites. This portfolio set-up might explain why investors have opted to sell active funds rather than passive ones.
A look at Expert Investor Europe’s proprietary data also gives us some clues to the dynamics behind asset growth in ETFs. During the whole of this year, fund selectors who plan to increase their exposure to index trackers have consistently outnumbered those who intend to decrease their overall allocation (see chart on the left). So this gives us some reason to believe ETFs will continue to increase their market share for some time to come. With the notable exception of Italy and Spain, a large majority of European fund buyers now use index trackers.
What we don’t measure, is how much of their total portfolios European investors have now allocated to passive investments. A recent poll at a large client event held last week by Schroders showed that there is still quite some room for more flows into index trackers, though the British asset manager phrased this message slightly differently. “Passive investments remain a sideshow in [investors] portfolios, with 58 per cent of the audience [of 110 fund buyers] investing less than 10 per cent in passives,” its press communication said.