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Europe ETF Flows in Q2 2019 Reveal Investors’ Concerns

Investors shifted focus from European equities to fixed-income securities in Q2 2019

Jose Garcia-Zarate

 

The analysis of exchange-traded funds flows is often a good gauge of investor sentiment, since investors tend to take advantage of ETFs’ intraday trading nature to quickly express views on the economy and financial markets. And, the flows in second-quarter 2019 indicated that European investors may be increasingly concerned about the arrival of dark clouds.

Overall, the European ETF market, inclusive of exchange-traded commodities, reflected net inflows of EUR 10.1 billion in this period, but there was a clear preference for fixed-income and commodities at the expense of equities.

This was a classic case of risk-off behaviour arising at a period of growing doubts about the shape of the global economy. The policy messages delivered by key central banks, particularly the U.S. Federal Reserve and European Central Bank, have taken on a distinctly dovish tone. And for many investors, this was the signal to unwind positions in equity markets and seek refuge in other asset classes.

Below, we map out how this movement took shape in second-quarter 2019 flows.

An overview of second-quarter ETF flows

The chart below illustrates that equity ETFs had net outflows of EUR 4.0 billion in second-quarter 2019 while fixed-income ETFs attracted inflows of EUR 11.0 billion. Commodities—particularly gold—delivered a strong performance in that period, taking in EUR 2.1 billion.

Fixed-income ETF flows

In an environment where many European countries’ government yield curve was in mostly negative terrain, investors made a beeline for the areas of the market that still offered above-zero yields. The chart below shows that Euro corporate and high-yield bond ETFs were the highest money-gathering fixed-income categories in the second quarter, with EUR 2.7 billion and EUR 1.4 billion of inflows, respectively.

Particularly noteworthy is the iShares Core Euro Corporate Bond ETF, which revealed the European ETF market’s largest inflows in the second quarter and has become the first fixed-income ETF in Europe to surpass EUR 10 billion in assets. 

Equity ETF flows 

As demonstrated on the chart below, European large-cap equity ETF Morningstar Categories were among the main casualties in terms of outflows. Broad eurozone, German, and French large-cap equity ETFs all landed in the bottom five, with outflows of EUR 2.9 billion, EUR 1.2 billion, and EUR 0.7 billion, respectively.  

Aside from local concerns—for example, the ongoing Brexit saga—investors are also uneasy about the negative impact that the trade war between the U.S. and China could have on export-oriented economies, such as Germany.  

But there were some bright spots in equity. Saudi Arabia equity ETFs proved to be a hit following the decision to include the country in the MSCI Emerging Markets Index in late March. Investors didn’t want to pass the opportunity to grab a slice of an equity market that offers above-average dividend yields relative to many other emerging markets.  

Environmental, social, and governance ETF flows 

Another thriving area is that of environmental, social, and governance. The chart below shows that ESG-focused ETFs attracted EUR 2.8 billion in the second quarter. This represented 27.5% of the total net flows in European ETFs over the period. Assets under management grew to EUR 15.9 billion from EUR 12.7 billion in the first quarter and already represents 2.0% of total assets invested in ETFs in Europe.

  

ESG has become one of the hottest trends in investing and a key area for product development for most ETF providers. While the bulk of assets is in equity ESG ETFs, there are now more bond ESG ETFs hitting the shelves as well.  

The full report is available inMorningstar Direct℠ Research Portal.If you’re a user,you have access. If not,take a free trial. 

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