A Resilient Year for European ETFs

• European-domiciled ETFs posted $88 billion of net inflows in 2022. Global developed equities and US large caps drove much of the flows, as investors favoured higher quality exposures, while energy stocks also saw strong inflows. 
• Fixed income captured nearly $32 billion in 2022, despite the challenging backdrop with elevated inflation, monetary tightening and war in Ukraine.
• Meanwhile, commodities saw net outflows of $4.8 billion, mainly fuelled by outflows from broad commodity exposures (-$3.2 billion) and precious metals (-$1.0 billion).

Flows Reflected Market Sentiment Throughout the Year

ETFs posted more than $88 billion of net inflows in 2022. Despite the challenging backdrop of elevated inflation, monetary tightening and war in Ukraine, equity ETFs added $59 billion. Even though yields increased across all markets, fixed income ETFs attracted $32 billion, helped also by the risk-off investment sentiment and investors weighing the new yield alternative relative to equities. Meanwhile, commodities weathered net outflows of $4.8 billion, mainly fuelled by outflows from broad commodity exposures (-$3.2 billion) and precious metals (-$1.0 billion).

The evolution of flows into ETFs reflected performance and market sentiment throughout the year, with inflation acting as the dominant force driving markets. Inflation’s surge to 40-year highs has led the US Federal Reserve (Fed) to move forcefully and raise the fed funds rate by 75 basis points four times between June and November last year. Before 2022, there had not been a single 75-basis-point increase since 1994.

After a strong January 2022 and muted but still positive flows in the following months, European ETFs saw net outflows of $4 billion in July as the Fed raised the fed funds rate by 75 basis points for a second time in a row, pushing bond yields higher and sending stocks into bearish territory, which almost continued into the end of the year. Overall, Q3 saw net outflows for European-domiciled ETFs, especially from equity and commodity exposures. Nevertheless, after the lower-than-expected US Consumer Price Inflation print on 10 November, investors returned to both equity and fixed Income exposures, which gathered $9.2 billion and $ 8.2 billion, respectively, to end the year on a more positive note.

Equity Investors Went Global But Also Liked US and EM

Global exposures dominated equity flows in 2022, gathering $36 billion – or more than 50% of all equity flows. US and emerging market exposures also saw net inflows of $18 billion and $12 billion, respectively. Investors have been turning away from broad European equities, which lost $7.7 billion last year, as the region was impacted by war in Ukraine, high inflation and stronger monetary policy tightening than initially expected.

With the exception of energy, all sectors exhibited negative performance last year. In this context, investors favoured defensive sectors such as health care and consumer staples, which collected $1.8 billion and $1.4 billion, respectively, last year. Meanwhile, financials witnessed the heaviest outflows last year, losing $3.6 billion in total.

Fixed Income Investors Favoured Safe Havens

Amid the risk-off environment, both government and investment grade corporate fixed income enjoyed net inflows, taking in nearly $17 billion and $15 billion, respectively, in 2022. Investors continued to practice caution, favouring higher quality exposures such as US and Euro treasuries as well as investment grade corporate funds.

US Treasuries were the top-gathering strategy for fixed income in 2022, with more than $15 billion of inflows. Investors seemed to be comfortable bearing the risks under uncertainty, given the high rates volatility. 

On the other hand, we saw net selling of emerging market debt, primarily driven by outflows from China bond ETFs, reversing almost all of the 2021 inflows of $10 billion. The easing of COVID restrictions, together with measures to stabilize the real estate sector, have brought about a more positive outlook for the Chinese economy and potentially a gradual shift in investor sentiment toward Chinese assets. Lastly, as anticipations of inflation reverted toward long-term averages, with 10-year breakeven inflation hovering between 2% and  2.5%, inflation-protected exposures endured net outflows of $5.2 billion as, for the most of the year, investors started to expect a turn in inflation going into the second part of 2022 and 2023.