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Investors favour ETFs in times of market turmoil

During times of market downturns, European investors have preferred to allocate their money to exchange traded funds (ETFs), Refinitiv/Lipper research has found.

ETF net flows increased in 2008, 2011 and 2018 while mutual fund flows decreased, the data has shown (see chart below).

Detlef Glow, head of Lipper Emea research, told Expert Investor that investors opted for ETFs because actively managed funds have not proven they deliver better results in uneasy markets.

He noted that “a high number of actively managed funds do not manage volatility; ie these funds face mainly the same losses and volatility as their underlying markets”.

Glow also pointed to the benefits of ETFs in terms of their transparency and liquidity characteristics.

Observing a similar trend, Olivier Paquier, head of ETF distribution Emea at JP Morgan Asset Management, said: “High market volatility typically sees greater flows into ETFs due to the embedded liquidity advantage provided by the ETF wrapper.”

Rising fixed income ETF flows

Meanwhile, for this year, Paquier said that he has seen fixed income ETF flows surge.

“Year-to-date, net new assets into ETFs have primarily been into fixed income ETFs; which, given stressed market conditions, doesn’t come as a surprise,” he added.

Vincent Denoiseux, head of ETF research and solutions at Lyxor Asset Management, highlighted to Expert Investor that “fixed income ETFs, in particular, play an increasing part in reducing a portfolio’s volatility”.

He continued: “ETFs have gathered €3.4bn through February 2020. Flows into fixed income remained strong (€2.2bn) while equity ETFs accumulated only €1bn, suffering from the potential impact of covid-19 related uncertainties. ESG ETFs continue their strong trend and gathered €3.5bn. Smart beta ETFs recorded limited outflows (€-0.19bn).”

Denoiseux explained: “Through currently elevated market volatility, we expect equity ETF flows to temporarily suffer, and fixed income ETFs to raise more assets. Should market conditions become calmer, we expect investors to heavily rely on equity ETFs to regain market exposure, benefiting from the liquidity, simplicity and transparency of these vehicles.”

General ETF trend

Refinitiv Lipper data has shown that the majority of flows in 2019 were invested in passive products. ETFs enjoyed inflows of €106.7bn over the course of 2019, while index-tracking mutual funds enjoyed inflows of €73.0bn (see chart below).

In 2018, where markets were volatile, actively managed funds dropped by €205bn in flows while ETFs (€42bn) and indextrackers (€34bn) saw positive flows (see table below).

In terms of asset managers, BlackRock sold by far most ETF products to investors in 2019 (see chart below).

Glow explained that “generally speaking, we see a trend towards passive products, driven by the ongoing discussion about the high fees of active managed funds and a better understanding of the features of ETFs”.

Elena Johansson

Senior Reporter

Part of the Mark Allen Group.