Investors across Europe piled into exchange-traded funds (ETFs) in the first half of 2014 in a dramatic reversal of fortune from the past three years.
According to new research from Morningstar, ETFs listed in Europe saw net inflows totalling €22.9bn (£18.1bn) in the first six months of 2014.
The strong inflows reversed a decline that had seen the amount of new money flowing into ETFs drop from €51bn in 2008 to just €10.3bn in 2013.
If the level of inflows is matched in the second half of the year, it will be the second-highest year on record for European ETF sales.
Morningstar claimed the sharp increase in inflows ran counter to the expectations of ETF critics, who predicted ETF inflows were a “direct consequence of the global economic crisis and would deflate once active managers were again in a position to sell the virtues of a bull equity market”.
The asset class that saw the most net new money in the first half of the year was equities, which had net inflows of €13.1bn, but fixed-income funds also had a strong period.The €9.9bn of net new money that flowed into fixed-income ETFs in the first six months of 2014 was more than the net new money in any other full year on record.
While the inflows into fixed-income ETFs were heavily skewed towards the first quarter of this year, equity fund inflows dominated in the second quarter.
Following a damaging year for commodity ETFs in 2013 – when a combination of outflows and falling asset prices saw the amount of money in the products nearly halve – the asset class suffered a net outflow of only €200m in the first half of 2014.
The outflows were led by investors in ETFs that track the gold price, in spite of gold delivering the best return out of any major asset class in the first half of the year.
The ETFs suffering outflows included the likes of the iShares S&P 500 Inc and iShares FTSE 100 Inc ETFs.
Morningstar pointed out that the outflows had nothing to do with sentiment towards UK and US equities, as both asset classes saw positive flows in the six-month period.
Instead, Morningstar said the outflows from those ETFs came about because iShares kept its total expense ratios at 0.4 per cent while introducing new ETFs tracking the same indices at a much cheaper price.
Morningstar said investors were being “cost-savvy” in switching out of the two iShares funds, adding that charging 0.4 per cent for large-cap developed equity exposures “is no longer justifiable”.
The Morningstar data measures ETF inflows on a pan-European basis. The firm said it could not identify UK-specific inflow data but said the “vast majority” of Europe-domiciled ETFs were listed on the London Stock Exchange.
IMA data on open-ended tracker fund inflows has also shown a marked increase in the use of such funds by UK investors. However, the IMA’s stats do not show any sort of decline in previous years. Indeed, 2013 was a record year for inflows into tracker funds.
