Morningstar predicts European ETFs to reach €2 trillion in assets by 2024

May 16th, 2019 | By | Category: ETF and Index News

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The European ETF industry is expected to experience robust growth in the coming years, spurred by favourable regulatory changes, innovation, and an increasing acknowledgement of the long-term benefits of low-cost investing.

Hortense Bioy, Director, Passive Strategies and Sustainability Research, Morningstar

Hortense Bioy, Director, Passive Strategies and Sustainability Research, Morningstar

That’s according to analysis from investment data and research firm Morningstar.

In the third edition of its “A Guided Tour of the European ETF Marketplace” report, Morningstar predicts that ETF assets under management across region will reach €1 trillion by next year, and €2tn by 2024.

The report notes that AUM in European-domiciled ETFs has more than doubled over the past five years, reaching €760 billion at the end of March 2019.

ETFs now account for 8.6% of total AUM in European investment funds, up from 5.5% five years earlier.

Hortense Bioy, Director, Passive Strategies and Sustainability Research, Morningstar, commented, “The well-entrenched trend of investor preference for low-cost investment solutions continues to support our positive outlook for the European ETF industry.

“In a market where product proliferation and price compression have become the norm, it is crucial that ETF investors do their due diligence. Looking beyond fees, understanding the index and evaluating the quality of the manager, not only based on its portfolio management techniques but also its stewardship practices, have never been so important.”

Equities dominate but fixed income gaining ground

The European ETF marketplace remains biased toward equities with equity ETFs accounting for roughly two-thirds of total AUM at the end of first-quarter 2019.

ETFs providing fixed income exposures have seen the strongest growth, however, more than quadrupling their assets over the past five years.

Source: Morningstar.

Source: Morningstar.

According to the report, the surge in fixed income ETF assets may be attributed to improvements in bond index construction, as well as technical developments that have allowed market makers to overcome technical barriers previously inhibiting real-time pricing for over-the-counter assets.

Three areas of ETF innovation

As the space for mainstream exposures becomes increasingly crowded, Morningstar notes that many ETF providers are seeking opportunities that allow them to differentiate themselves and maintain margins.

The report highlights three popular areas of product development:

  • Strategic beta. With most new launches focusing on multifactor equity strategies, providers are marketing these products as a way to improve the risk/return profile of a broad market-cap index. Morningstar advises diversifying across factors to help curb the impact of long periods of underperformance commonly experienced by single-factor strategies.
  • Technological ETFs, in particular, have caught investors’ attention, with launches covering artificial intelligence, cloud computing, digital security, and e-commerce being notably prominent.
  • Sustainable investing has outgrown its niche to become one of the most fiercely contested areas of product development. ESG ETF assets grew by 50% in 2018 to €9.9bn, and 36 new products came to market, as compared to 15 in 2017.

Ongoing fee pressure

The downward pressure on ETF fees continues to shape the market, both for mainstream exposures and beyond.

Source: Morningstar.

Source: Morningstar.

Kenneth Lamont, Research Analyst, Passive Fund Research, Morningstar, commented, “Over the past two years, we have seen fee competition intensify across the ETF space, as average ongoing charges have fallen across the main equity and bond categories. This movement may be owed to a growing sense that the development and management requirements of these products do not justify substantially higher fees.”

Lamont notes that the field of sustainable ETFs, in particular, has seen increased fee competition. Last year saw the launch of several aggressively priced ESG ETFs from iShares, DWS, and Legal & General Investment Management, with funds ranging in price from 0.05% to 0.20%, which has considerably lowered the premium paid on ESG products.

Despite competition driving fees lower, Morningstar notes that European ETFs remain relatively expensive when compared to the US market.

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