The European ETF market has posted the best ever quarter in terms of net inflows in Q1 2015. According to preliminary calculations, investors directed €30.8 billion of net new money to European-domiciled ETFs during the first three months of 2015. This was by far the highest sum channelled into ETFs in a single quarter; greatly surpassing the previous high of €17 billion posted all the way back in Q4 2008. In fact, by historical standards, this quarterly sum is more akin to the figures the European ETF market has usually posted on a full calendar year basis. Indeed, 2014, which I personally dubbed “a fantastic year for the ETF industry” saw net inflows of €43.5 billion for the entire year.
Looking at the Q1 2015 outturn, it seems as though I may have been a bit excessive in my laudatory treatment. Then again, Q1 2015 could well prove a one-off. However, looking at investing attitudes in the US, where growing dissatisfaction with active managers has already made low-cost passive investing the default option for the wider investing community, one cannot but wonder whether these are the makings of a “new normal” for European investing too. I guess we’ll just have to patiently wait and see.
Assets under management (AUM) in European-domiciled ETFs at the end of Q1 2015 totalled €462 billion; a 21% increase from the €381 billion totted up at the end of 2014. The €80.7 billion increase in AUM was thus the result of €30.8 billion in net new money and capital appreciation to the tune of €50 billion.
Investors Pile into European Assets
The breakdown of the data shows that €16.2 billion of new net money was directed at equity ETFs and €11.9 billion to fixed income ETFs, with both broad asset classes experiencing substantial capital appreciation over the quarter.
This was a rather impressive – though largely expected – outcome. Indeed, for all the disquisitions about the merits of passive management, the fact is that Q1 2015 was marked by a particular factor – namely ECB monetary activism (i.e. QE) – that encouraged European investors to take investment positions across both equity and fixed income in a rather decisive manner. Decisive because of the one-way investment bet that was before all of us.
This may have contributed to the unusually above-average quarterly data for ETFs. For one thing is clear, when faced with one-way bets, there is next to no value active managers can bring to the table, which, by definition, plays strongly in favour of low-cost passive funds.
Delving deeper into the data, it becomes even clearer that ECB QE was the major factor driving investment decisions during Q1 2015. Whereas in 2014 the clear preference was to pile into the comparative success of the US economy (e.g. S&P 500 ETFs routinely topped the “most wanted” list), in Q1 2015 investors turned en masse to European assets. The top 10 ETFs in terms of net new inflows during the period include a variety of broad European and Eurozone equity exposures (e.g. MSCI Europe and MSCI EMU) plus two ETFs providing exposure to the EUR-denominated corporate bond market, both investment grade and high yield.
According to our calculations, net new money into broad Europe and Eurozone large cap equity ETFs amounted to €12.75 billion over the quarter. Also popular were ETFs providing exposure to the Japanese equity market. Meanwhile, net new money into EUR-denominated fixed income ETFs (i.e. including government, corporate and high yield) easily surpassed the €6.5 billion figure. At the other side of the spectrum, investors liquidated positions in US large cap equity ETFs to the tune of €2.3 billion.
This fully fitted in with the notion of a one-way bet whereby both European – and particularly so, Eurozone – equity and fixed income asset prices were bound to be boosted by the mere announcement and rolling out of the ECB QE programme. Now this has happened, a continuation of the good run for European assets in coming quarters would be more dependent on the expectations generated by QE translating into substance (i.e. the sustained reflating of the Eurozone economy; not to mention a limited fallout of a potential Greek euro exit).
What About Strategic Beta ETFs?
Indeed, what about it? After all, this is the hottest topic in ETF town. Well, our preliminary calculations show that investors directed some €3.9 billion of net new money into these vehicles during Q1 2015. This represents 13% of the total quarterly net flows into ETFs in Europe. By far, as per Morningstar’s own classification of this space, the strategic beta group that continued to attract most interest was that of return-oriented strategies, with an estimated €3 billion of net inflows over the period. This was followed by risk-oriented strategies with €0.7 billion and “other” with the remaining €0.2 billion.
As a whole, AUM in strategic beta ETFs in Europe has increased to just shy of €30 billion (i.e. around 6% of total ETF AUM assets) from the €22.5 billion recorded at end 2014. This implies that in Q1 2015 these strategies delivered investors with capital appreciation of €7.4 billion.
A more distilled analysis of the quarterly data for the equity-dominated strategic beta ETF universe showed a preference for European assets. Investors also sought out Japanese equity exposure; while a fair number of US large equity strategic beta ETFs experienced net outflows over the period. Overall, this broadly mirrored the trends observed in the wider ETF universe.
