ETFs Back in Favour After Market Crash

Exchange traded fund assets are on course to reach €1 trillion in 2020, as investors return to passive funds after Covid-19 sell-off

Holly Black 13 July, 2020 | 11:34AM
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Investors poured €33.4 billion into exchange traded funds (ETFs) in the three months to July, more than making up for the outflows sparked by Covid-19 panic in the previous quarter.

Morningstar data shows total assets in ETFs rebounded to €903 billion in the second quarter of 2020, after falling to €780 billion after the sell-off in March. The sharp turnaround in sentiment puts the ETF market back on course to reach an incredible €1 trillion this year.

ETF Inflows

Some 70% of the inflows in the second quarter of the year went into Bond ETFs, a total of €23.3 billion. Meanwhile ETFs focused on environment, social and governance (ESG) investing attracted €6.7 billion of investors cash – considerably more than their mainstream peers.

Equity Investors Follow Lockdown Themes

While equities were not the top choice for ETF investors, there were some clear trends between the most and least popular options in this field. Large-cap and growth strategies are clearly in favour, and investors are also trying to tap into the gains made in the technology and healthcare sectors across global stock markets.

Morningstar analyst Jose Garcia-Zarate says: “It signals that investors made very pointed investment decisions to fit the expectations of how the economy might respond and evolve to the unfolding Covid-19 crisis.” Healthcare equity ETFs, for example, focus on a sector bound to benefit from the development of a cure or vaccine for the virus, while tech-focused ETFs tap into the trends of that have defined lockdown, such as home-working and schooling.

At the other end of the spectrum, value strategies and emerging markets are among the least popular categories with investors. “Outflows from emerging market equities reflect the concerns that investors harbour about the effect of the pandemic on some of these economies,” adds Garcia-Zarate.

Equity ETFs

In the fixed income space, corporate bonds have been the top choice. But measures put in place by central banks and governments around the world have made bond ETFs seem a largely safe place for investors to shelter from market volatility. US dollar options make up three of the five most popular categories for the quarter after the US Federal Reserve unleashed more quantitative easing measures.

Fixed Income ETFs

Thematic ETFs have grown in popularity, as seen in the most popular equity choices. Assets in thematic ETFs grew by €1.6 billion to almost €12 billion by the end of June. Garcia-Zarate says: “Many of these products tap into sectors that will shape the economy of tomorrow and, in some cases, have directly benefits from how working practices have been affected by the pandemic.”

He points to the WisdomTree Cloud Computing ETF as one example. Its assets grew from just €20 million to €110.7 million over the second quarter.

But it was iShares that topped the table for inflows by provider, attracting €19.4 million of new money in the second quarter of the year. This can be largely attributed to the firm’s dominance in fixed income ETFs across Europe, where its market share is a hefty 62%.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk