Second Quarter Flows Show European ETF Investors Rediscovered the Value Factor

Exchange Traded Fund Updates

Flows to European exchange-traded funds declined in the second quarter, but this has to be seen against the backdrop of two extremely strong previous quarters.

Value funds performed well, but some of the most requested ETFs this time around were old favorites, including quality funds, US and global broad funds, and those that lean towards environmental, social and security principles. governance (ESG).

The most popular ETF categories from research provider Morningstar were global and US large-cap funds targeting a combination of investment factors. When it comes to individual funds, some of the most bought names were mainstream and ESG-themed US equity ETFs, suggesting that the world’s largest market wasn’t exactly out of fashion. Likewise, some investors have returned to one of the major investing styles of the decade, with € 1.2 billion invested in quality factor ETFs in the second quarter, compared to a net outflow of € 0.19 billion. euros in the previous quarter.

Flows to ESG ETFs slowed from a record € 28 billion in the first quarter to just over € 13 billion in the second quarter. The level of ESG ETFs outstanding rose from € 120.8 billion to € 140.4 billion.

This article was previously published by Investors Chronicle, a title belonging to the FT group.

Yet Morningstar’s fund flow data also shows ETF investors across Europe continued to reckon with the prospect of resurgent growth and inflation in the second quarter. As Jose Garcia-Zarate, associate director of passive strategies at Morningstar, said, it was “too early to say that investors could lose confidence in the post-coronavirus pandemic economic recovery” as the quarter drew to a close. Three of the top 10 ETFs by net cash flow in the second quarter were value funds, with iShares Edge MSCI World Value Factor UCITS ETF (IWVL) in second place.

Value ETFs are now the second largest sub-sector in terms of assets under management, behind dividend ETFs. 3.74 billion euros were spent on “value” products in the second quarter, compared to 5.28 billion euros in the first quarter, although this may simply reflect weaker overall demand for ETFs. However, the inner workings of factor ETFs need to be looked at closely.

Investors continued to weigh the threat of inflation in other asset classes. Morningstar notes that flows to bond ETFs amounted to € 10.1 billion in Europe in the second quarter, compared to € 4.3 billion in the previous quarter. More importantly, they “pumped money” into term shortening strategies to mitigate the risk of rising interest rates amid inflationary pressures. Half of the top 10 selling bond ETFs offered exposure to time-limited bonds. Inflation-linked bonds in the United States also attracted funds.

Meanwhile, Morningstar noted at the end of July that the iShares China CNY Bond UCITS ETF (CNYB) had already become the second-largest bond ETF in the European market. It wasn’t launched until the summer of 2019, but it had over $ 12 billion in its various share classes at the start of June. In a year when Chinese stocks have weakened, the ETF has held up relatively well, achieving a total return in sterling of around 3% in the first seven months of this year. In contrast, the CSI 300 index of Chinese stocks fell around 3.5% in sterling over the same period.

Thematic funds have seen a slowdown in investor demand, but they continue to play an important role in the ETF space. After having accumulated a record of € 5.5bn in the first quarter, flows towards thematic areas fell to € 1.9bn in the second quarter. That said, thematic ETF assets hit a new high of 32.4 billion euros in the second quarter, compared to 29.4 billion euros in the first quarter.

While flows have fallen, thematic ETFs continue to proliferate in Europe, with nine launches in the second quarter alone, against a record 17 launches for the whole of 2020.

As with other themes, these names focus on trends and niche but potentially promising sectors, from industries of the future to potential Covid-19 recovery games. Very different examples of the first category include L&G Digital Payments UCITS ETF (DPAY) and Procure Space UCITS ETF (YODA). The Digital Payments ETF, unsurprisingly, has high allocations to the tech sector and the United States, with 43 companies in the index it tracks. Its top 10 recent titles include Shopify, PayPal, and Square. The top 10 holdings made up about a quarter of the fund’s assets at the end of June.

The Procure Space ETF held 35 stakes at the end of June, including Virgin Galactic and Trimble. Investors should note that, like some other thematic ETFs, it has a hefty fee of 0.75%. It also faces some competition from the recently launched Seraphim Space Investment Trust. The trust tackles the same topic in a noticeably different way, with an emphasis on unlisted companies. The two funds are likely to involve different types of risk.

When it comes to Covid-19 recovery games, one option that emerged in the second quarter is the UCITS ETF (TRYP) of airlines, hotels and cruise lines. The fund held 62 stakes at the end of June, with 44.1% of its assets in airlines, 40.3% in the hotel sector and 15.6% in cruise lines. Its major recent holdings include Hilton Worldwide, Ryanair and Carnival.

Another interesting ETF to launch in the second quarter was Saturna Sustainable ESG Equity HANzero UCITS ETF (SESG). An actively managed global ESG equity fund, it sets itself apart by integrating carbon offsetting into its processes through projects focused on issues such as forest conservation.

* Investors Chronicle is a 160-year-old Financial Times publication providing expert, independent insight into the investment market. It provides educational features, investment commentary, practical advice, and personal finance coverage. To learn more, visit

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