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European ETFs Proved Resilient in 2023

2023 was another successful year for European ETFs. 

Flows in 2023 were driven by equities, primarily into global developed and US Large Caps, as investors favoured higher quality exposures, and technology stocks. Fixed Income captured nearly $63 billion, despite historic rise in global bond yields. Meanwhile, Commodities saw net outflows of $4.8 billion, mainly fueled by outflows from Precious Metals (-$9.6 billion) commodity exposures.

ETF Strategist

European ETFs Proved Resilient in 2023

  • European-domiciled ETFs saw strong inflows in 2023, posting $163 billion of net inflows, up from $88 billion of positive flows in 2022, driven by equities primarily into global developed and US Large Caps, as investors favoured higher quality exposures, and technology stocks.
  • Fixed Income captured nearly $62 billion in 2023, despite historic rise in global bond yields and uncertainty around the path of inflation and mixed economic data of strong labour markets but weak PMIs.
  • Meanwhile, Commodities saw net outflows of $4.8 billion, mainly driven by Precious Metals (-$9.6 billion).

Flows Reflected Market Sentiment Throughout the Year

European-domiciled ETFs saw strong inflows last year, posting $163 billion of net inflows, up from $88 billion of positive flows in 2022. By the end of 2023, Europe-domiciled ETFs achieved an all-time high level of assets under management, over $1.8 trillion. In five years, the European ETF industry doubled its AUM, with equity flows leading the charge.

The evolution of flows into ETFs reflected performance and market sentiment throughout 2023, with macro uncertainty, geopolitical upheavals and structural shifts as forces driving markets. Overall, economic growth across many economies has proven remarkably resilient in the face of rising rates. Meanwhile, Inflation has retreated from its multi-decade highs. Against this backdrop, the historic rise in global bond yields has reshaped the investing landscape. Higher rates give investors more choices in building their portfolio strategies than at any time since the global financial crisis. Despite recession fears fueled by tighter monetary policy, banking sector hiccups and elevated geopolitical tensions, all major asset classes experienced positive returns last year, retracing partly from the 2022 falls and delivering above consensus expectations.

Equity ETFs saw positive inflows throughout last year, adding in total $99 billion in net new flows. Although equity ETFs make up the majority of ETF assets, Fixed income ETFs had one of their largest year of inflows, attracting $62bn, as more investors migrate to the fund structure for bond exposure. Money market funds also gathered $5.1 billion in net inflows — one of the largest year of inflows for this asset class. Meanwhile, Commodities suffered outflows of $7.0 billion, primarily fueled by Precious Metals exposures (-$9.6 billion).

Despite a fluid landscape for SFDR classification flows to sustainable funds continued to grow in 2023, particularly in Equities, which accounted for $37.9bn or ca 38% of the total inflows. ESG flows were driven first by US exposures, which took in $12.4bn. Meanwhile, Fixed Income funds with ESG classifications gathered $13.5bn in total or ca 20% of Fixed Income flows. These were led by Investment Grade ETFs, which added $6.4bn of net new assets.

Source: Morningstar, YTD as of 31 December 2023. Flows are as of date indicated and should not be relied upon as current thereafter. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.

Equity Investors Went back to Benchmark Allocations

Global and US exposures dominated equity flows in 2023, gathering $38 billion and $35 billion, respectively — or just shy of 75% of all equity flows. As risk-off sentiment prevailed for part of the year, flows flocked to benchmark allocations rather than sectoral bets. Emerging Market and Europe exposures also saw net inflows for $14 billion and $ 7 billion, respectively. On a relative basis, EM flows were strong but European exposures were fairly muted despite a strong start in January 2023.

The main drivers of performance for the year was a concentrated tech stock rally, as generative AI went mainstream. Investors demand for exposure to the sector with Technology taking in $2.1 billion. Meanwhile, Financials witnessed the heaviest outflows last year, losing in total $2.8 billion against the SVB debacle and Credit Suisse turmoil in March. Quality added $1.9 billion and emerged as one of the year’s favoured factor as investors preferred exposures with strong profitability, low leverage, and low earnings variability.

Fixed Income Investors Favoured Safe Havens

Amid economic uncertainty, Government and Corporate continued to lead flows into Fixed Income, taking in nearly $34.4 billion and $23.0 billion, respectively. Of note, inflows into both segments went into quality areas, such as US and EMU government debt or investment grade corporates. On the other hand, Inflation-Protected exposures endured net outflows of $2.4 billion as, for the most of the year, investors expected and awaited inflation slowdown.

All parts of the curve enjoyed net inflows last year. Short-term Bond ETFs saw $4.6 billion of flows in the first quarter, as investors took advantage of the inverted yield curve in the first quarter to shorten their duration as the Fed continued their hiking cycle. As the year advanced, the situation changed. In the last quarter, as it became clear that the Fed was likely done hiking, investors moved into long duration ETFs which saw $2.3 billion of inflows over the quarter and ended the year adding $6.7 billion of net new assets.

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