LONDON, FRIDAY 1ST MARCH 2024: The European exchange-traded fund (ETF) market achieved a record 28% growth, reaching over $1.8trn assets under management (AUM) in 2023, according to EY’s latest research, as strong market performance and buoyant investor preference fuelled significant growth in the asset class. This growth is expected to continue at 15% annually for the next five years and reach over $4.5trn AUM by 2030.
The research – which models growth, analyses performance, and incorporates the views of issuers managing for more than 60% of the European ETF market – found that active funds particularly will drive ETF AUM across the region from this year, and that managers across the board are focused on increasing retail participation, progressing ESG activity and unlocking the opportunities of AI and digital assets.
Lisa Kealy, EMEIA ETF Leader at EY, comments: “The European ETF industry had a stellar year in 2023, reaching a record new high of $1.8trn in AUM. As the sector further matures and investor interest deepens, we expect growth to continue over the next five years.
“To fuel this growth, we expect increasing numbers of new providers to enter the market and capitalise on active ETF flows, and for an uptick in retail investment in the sector. Investment in, and integration of, new tech will be crucial for all providers as they look to attract investors and meet their ever-changing and growing needs.”
Ireland to increase its ETF market share
More than 70% of European ETFs were domiciled in Ireland in 2023, and this is expected to rise in the short-term, with AUM forecast to exceed $3trn by 2030. Europe’s second largest ETF market is Luxembourg, with 29% market share currently.
Lisa Kealy continues: “Ireland continues to operate as the location of choice for ETFs, and we expect to see steady growth over the next five years. This is in large part down to the country’s mature financial services sector, its skilled talent pool and the gold standard regulatory environment.”
AI-powered ETFs expected to develop over 2024
Artificial intelligence (AI) is reshaping the asset management industry, and managers are increasingly investing in the new technologies to improve investment decision-making. AI is principally being used to conduct big data analysis, identify and predict patterns and trends, and run investment research. For ETFs, AI can also be used to identify and react to market events, which is particularly powerful for index-tracking.
A maturing approach to ESG
Inflows into environmental, social and governance (ESG) ETFs dropped globally in 2023, in favour of asset classes deemed to be safer in a challenging economy, such as large cap equities, government bonds or short duration debt. However, despite current investor caution, ESG-focused ETFs are expected to remain a long-term investment theme, especially in Europe, which leads the global market and accounted for a quarter of all ESG ETF flows in 2023.
At the end of 2023, $345bn had been invested into European ESG ETFs. While this is not insignificant, it represents less than 5% of the global market and only 19% of the European market, illustrating the potential for growth.
Digital Assets Gain Momentum
Digital assets continue to gain traction across Europe, boosted by the approval from the US SEC for bitcoin ETFs in January 2024. Across Europe, digital assets represent $13bn of ETPs, with wider adoption expected going forward.
Hermin Hologan, EMEIA Wealth & Asset Management Leader at EY, comments: “Growth in the current environment is no easy feat, and the industry’s focus on digital innovation to transform distribution channels and modernise how they operate will serve it well. Progress and innovation in digital assets particularly should go some way to helping ETF providers achieve greater profitability.
“On the sustainability side, ETF managers need to keep a sharp focus on both passive and active funds, ensuring they are keeping up with investor demands and clearly communicating activity. Investors’ appetite for more sustainable products and services is on the up, and the most savvy firms are those increasingly incorporating all elements of E, S, G into their businesses.”
