Institutional Demand, ESG Funds to Drive European ETF Market

“Robust and Diversified ESG Value Propositions” Needed to Compete in Crowded Market.

The future is bright for the exchange-traded fund (ETF) market in Europe, according to a new report released by research firm Cerulli Associates. Nearly all the ETF issuers surveyed by the firm expect healthy levels of annual growth in the ETF market over the next two years. Increasing demand from institutional investors and a growth in appetite for ESG-themed funds are predicted to be key drivers.

From playing a minor role in European investors’ portfolios, ETFs are increasingly regarded as a core low-cost building block of long-term buy-and-hold strategies. Cerulli’s research shows that the fastest growth is likely in Switzerland and the UK, where 50% and 45% of survey respondents respectively expect the passive ETF market to expand at an annual rate greater than 10%.

Interest in ESG ETFs is also on the rise among European investors, according to data from the report.

By the end of May 2020, European ESG ETF assets had reached €36.5 billion (US$41.0 billion), a 28% increase from the end of 2019. More than half of the ETF issuers surveyed by Cerulli identified the development of ESG ETF products as a top priority for the next two years.

“The European ETF market has become increasingly crowded in recent years, with new players arriving and incumbents broadening their product ranges,” said Fabrizio Zumbo, Associate Director, Cerulli Associates. “Entering these markets with a standard value proposition may no longer be enough to attract flows from sophisticated investors. ETF issuers should develop specialised offerings with robust and diversified ESG value propositions, including active and smart beta products, to differentiate themselves.”

Several factors are driving European investors’ increasing use of ETF products. More than one-third (35%) of the ETF issuers surveyed in Europe consider institutional investors’ increasing adoption of ETFs the major driver of ETF asset growth. A similar number (32%) see the increased availability of fixed-income ETFs and the use of ETFs by digital platforms as significant.

Cerulli surveyed a range of market participants including ETF issuers, asset managers, independent financial advisors, market makers as well as distributors in key European nations.

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