Demand for exchange-traded funds in Europe persisted last year despite challenging markets, Cerulli Associates said in a report released Tuesday that cited greater product specialization and the popularity of thematic investing as fueling growth.
Last year proved challenging for the asset management industry in Europe and elsewhere as investor sentiment shifted to "a certain degree of risk-off in response to rising inflation, central bank rate hikes, and fears of a slowdown in economic growth," according to the February issue of The Cerulli Edge-European Monthly Product Trends report.
Despite those conditions, ETFs domiciled in Europe still managed to attract €77 billion ($82 billion) of net inflows in 2022, the report said, citing Morningstar data.
The European ETF market has evolved significantly over the past five years, the report said. Asset managers and ETF issuers have devoted more resources toward product development, the report said, adding that the increasing specialization of the ETFs available in Europe — by geography, industry sector, credit quality and duration — has proven a catalyst for adoption.
"The ongoing innovation in the ETF field is giving local investors a diverse array of options in terms of asset classes and sectors," said Fabrizio Zumbo, director of European asset and wealth management research at Cerulli, in a news release Tuesday. "A growing number of managers are also entering the ETF space with highly specialized offerings in the smart-beta and active ETF domain."
Thematic investing has become "hugely popular" in Europe — particularly during the COVID-19 pandemic — and the ETF wrapper has gained increased attention in that domain, the report said. While thematic ETFs faced headwinds last year amid a rotation away from growth and toward value and quality, demand for thematic ETFs is expected to increase across Europe as private clients increasingly buy into the narratives behind products, the report said.
Managers able to tell compelling stories will be well situated to succeed in that area, said Mr. Zumbo in the release. He could not be reached for comment Tuesday.
"ETF issuers need to work with clients and distributors to relay the message that megatrend-based investing is a long-term concept, with a five- to 10-year horizon," he said. "Clients want partners that can pitch a convincing narrative for why a particular theme is resistant to or can overcome any short-term noise."