As wrapped baskets of liquid securities turn to wrapped last-minute gifts, Europe’s ETF industry performs the uplifting annual ritual of applauding its own continued, explosive growth. Except, record-shattering inflows may be more of a vanity statistic than the more structural shifts which surfaced through the year.

According to data from ETFbook, European exchange-traded products (ETPs) gathered $252bn net new assets between the turn of the year and 12 December, not only marking the first time annual inflows have surpassed the sentimentally significant $200bn milestone, but also outstripping the previous record set in 2021 by more than $50bn.

However, as has been the case since the 2000s when multi-asset managers began incorporating passive instruments – and then ETFs – into their portfolios, inflows at high scale are as much an expression of market risk sentiment as they are enthusiasm for a particular delivery vehicle.

Indeed, inflows this year will be more than triple those booked during the turbulent year of 2022. Increasing US equity dominance in portfolios and investor psyches are also reflected in flows, with 12 of the year’s top 20 most popular ETFs being US equity strategies and 17 of the top 20 being ETFs at least two-thirds comprised of US equities, according to data from ETFbook.

So, a year of US equity led ETF expansion may not be entirely ground-breaking, especially when mutual funds had already booked $280bn inflows by the end of October. The more significant themes of the year were signs the wrapper is moving away from its traditional use cases and spheres of influence in Europe.

Active arrival

It will be little surprise that active ETFs receive a mention in this context. With assets under management (AUM) in the segment rising from a low base of around $23bn in January 2023 to $52bn by October this year, growth in relative terms has been strong. However, the dominance of a single provider and its low tracking difference ‘research enhanced’ active approach to-date show the convergence of ETFs and active in Europe is still more gradual behavioural change than rapid wholesale adoption.

What many will have paid closer attention to the early shoots appearing, with established managers – Janus Henderson, Robeco, American Century and others – entering ahead of the anticipated demand shift from active mutual funds to ETFs in Europe. These will likely be just the first of many, with Jupiter Asset Management set to debut ETFs in the coming months alongside Schroders “looking” at entering the space.

Keenly aware of this tide shift, regulators have been in a bidding war to gain market share in Europe’s burgeoning active ETF space. The Central Bank of Ireland (CBI) amended its stance of share class naming rules – enabling fund promoters to launch ETF share classes of an existing fund without having to rename the entire subfund – while Luxembourg’s parliament and Commission de Surveillance du Secteur Financier (CSSF) have attempted to coax issuers with favourable tax treatment on subscriptions and a shift to monthly disclosure of active ETF holdings in recent days.

Digital disruptors

Elsewhere, the potentially pivotal role – and influence – of low-cost, ETF-powered digital platforms in targeting a growing retail investor base has become apparent.

After Amundi launched Europe’s lowest-fee global equity ETF in March, the Amundi Prime All Country World UCITS ETF (WEBG), the French asset manager launched an accumulating share class of the ETF in June in response to demand from German retail investors, who have been channelled into ETF usage through savings plans offered by the likes of Scalable Capital.

Scalable’s role in driving ETF product development has become more explicit in recent days, with the German platform partnering with DWS to launch the Xtrackers Scalable MSCI AC World Xtrackers UCITS ETF (SCWX), which will be zero-fee in its first year and more impressively, will offer advanced ETF mechanics to retail investors by blending physical and synthetic replication.

The symbiosis of ETF adoption by retail investors and the rise of low-fee, ETF-powered digital disruptors will be one of the key dynamics to watch in the coming years. After Vanguard announced a minimum £4 monthly charge for UK customers investing less than £32,000, 100% ETF-based platform InvestEngine – which offers DIY investing accounts with no fee – saw the daily number of ISA transfers increase fortyfold versus its average rate over the following week.

Final word

To be clear, more than $250bn annual inflows in a year is no mean feat for a product class that entered Europe at the turn of the century. However, new use cases and investor audiences will shift our understanding of the wrapper’s role in Europe and potentially even who the key stakeholders might be.