Q3 2024 European ETF Demand Monitor

• Equity AUM hit new all-time highs in Q3, ending the quarter at $1.60 trillion. The strong flows were supported by a combination of robust $45.0 billion NNA and a strong market return.
• US equities were the largest contributors to inflows in the quarter with $15.6 billion, accelerating slightly compared to Q2 to give $43.4 billion NNA over the course of the year and accounting for more than a third of total equity flows YTD.
• Global equities came a very close second with $14.6 billion of inflows for the quarter and $42.8 billion YTD. Flows into products tracking the MSCI World index dominated the flows into global equity exposures with $7.2 billion of NNA in the third quarter, while broad global indices (EM & DM) captured $3.8 billion of inflows in Q3.
• European equities also continued to participate in Q3, with an additional $5.2 billion of NNA, continuing the trend seen in the second quarter, and taking YTD NNA to $12.0 billion. This made the region a comfortable third place in equity flows for the year so far.
• Smart beta products saw a surge of interest in Q3 with $5.0 billion of NNA in the quarter. This was mainly led by equal weight strategies, which captured 90% of the flows into this segment and may signal a growing concern about concentration risk in broad market cap-weighted exposures.
• Emerging market equities saw an acceleration of flows, gathering $3.0 billion of NNA in Q3, compared to $1.2 billion in Q2. The rebound in Chinese stocks during the last couple of weeks of September appears to have increased investor appetite towards products exposed to the broader EM space as well as China equity products over the last few days of the quarter.
• Thematics saw $0.3 billion outflow this quarter, with thematic-focused ESG products seeing the largest outflows of $0.6 billion, while non-ESG thematic products and simple screened approaches captured overall $0.3 billion NNA in Q3. Overall, thematic product gathered $2.1 billion so far this year, entirely driven by non-ESG thematic ETFs.
• Japanese equities saw a reversal from the previous quarters, being the segment with largest outflows for Q3 with $2.5 billion of outflows as investors reacted to a strengthening yen during July and August.

• Fixed Income ETFs saw a very strong quarter, with $23.3 billion of net inflows. This is 44% higher than the net inflows seen in Q2 and helped by the robust inflows experienced in July, the highest ever recorded in EMEA for fixed income securities.
• The key themes for Q3 have been around investment grade credit, alongside a continued appetite for safe-haven assets such as developed market government bonds and cash management strategies.
• Investment grade credit ETFs were the strongest category over the quarter, taking in $7.9 billion in NNA. Euro-denominated investment grade credit captured most of the flows ($4.2bn), followed by dollar-denominated investment grade bonds ($3.1bn).
• With $6.2 billion in NNA, developed market government bond ETFs were the second strongest category over the quarter. The flows were split across the various broad developed market government bond ETFs, with US Treasuries taking in $2.7bn while Euro government bonds and UK gilts each saw $1.4 billion NNA. However, it’s worth noting that US Treasury inflows went into ETFs focused on 0-1 year maturities which may have been used in favour of cash management products.
• Cash management ETFs were the next strongest category with $4.0 billion of net inflows, a continuation of the trend observed in H1. Fixed maturity ETFs also experienced further demand with NNA of $1.8bn, again potentially as a substitute for cash management as investors look to lock in yields currently available ahead of further anticipated rate cuts later in the year.
• Emerging market debt (including pure China Bond exposure) ETFs, saw a pickup totally driven by the inflows in EM government bonds ($1.1 billion), while Inflation remained out of favour, experiencing outflows of $1.1 billion.

• Commodities saw net outflows of $0.3 billion during the quarter, though the selling pressure was less pronounced compared to Q2. However, there were encouraging signs toward the end of the period, with net new assets turning positive in September.
• Flows into precious metals have been positive this quarter with $0.4 billion NNA, as the gold ETCs have regained interest in Q3.
• Other single commodity ETCs remained flat for the quarter, with net selling from oil products offsetting the inflows into copper ETCs.
• Broad commodity and smart beta products tailed off over the quarter, with $0.3 billion and $0.5 billion outflows respectively. 

Outlook for ETF flows in Q3 2024

EMEA ETFs have seen net inflows of $175.2 billion over the first three quarters. This is up 65% compared to the same period in 2023 and keeps NNA on course to beat record $192.9 billion set in 2021.

Following the European Central Banks decision to ease policy in June, both the Bank of England and the Federal Reserve cut rates during the third quarter, with most major central banks now in easing mode. Indeed, not only did the Fed ease policy, they did so with a larger than expected 50bps rate cut, and indicated that rates would need to be cut more quickly and deeply than they had previously expected. It is, however, worth noting that the Bank of Japan are going in the opposite direction and are tightening policy to curb inflation. During the quarter, concerns over the hawkish stance from the Bank of Japan caused some market volatility as the yen strengthened causing carry trades to be unwound. Investors used the pullback to add exposure to both equities and fixed income.

While central bank policy is likely to be supportive of financial markets in the coming months, some concerns still remain. Geopolitical risks continue to increase with the ongoing conflict between Russian and Ukraine while tensions in the Middle East are rising. Additionally, the US Presidential election result remains a close call as we head into the final weeks of campaigning. Nevertheless, there remains a positive tone in markets with many equity indices sitting at all-time highs. The current record levels of cash is likely to support markets in the final quarter of the year, as investors ready to put cash to work on any market pullback.

• Equities: Equities had a more mixed Q3 as markets pulled back sharply from the middle of July into early August, with large-cap tech stocks dragging indices lower. Investors were beginning to question the time it would take to see financial rewards from some of the sizable investments that many companies were making in artificial intelligence (AI). At the low point, in USD terms, US Developed and Emerging markets equities had all dropped around 5% from the start of July. Japan gave up more than 10% in the face of yen strength while Europe provided a relative safe haven with a 2.6% decline. Equity markets recovered as the quarter progressed. The greater than expected cut from the Fed and a raft of policy announcements in China were among the contributors to a more positive tone to the end of the quarter. Emerging markets gained 8.7% over the whole quarter, lifted by a 21.6% gain in Chinese equities in the last week of the quarter. Europe (+6.6%) was the best performing DM region, with Japan (5.7%) and US (5.8%) lagging somewhat. It was notable that the breadth of markets increased in the quarter. The S&P 500 Equal Weight outperformed its market cap weighted parent by more than 3% and the MSCI World Equal Weight index returned 10% over the quarter. Questions still remain over the concentration in markets, as noted above we have seen flows returning to equal weight approaches. The ongoing delivery of easier monetary policy may be expected to prompt investors to look again at some of the other unloved parts of the market with thematic exposures a potential beneficiary.
• Fixed income: Bond markets performed well in the third quarter, supported by central bank policy as most major central banks are now at the start of an easing cycle. Although government bond yield curves steepened, duration was generally beneficial as yields rallied over the quarter. Credit markets had a bumpy ride as unwinding of yen carry trades caused spreads to widen, but they rallied back to end the quarter at similar levels as at the start, with strong inflows seen when valuations cheapened. Looking ahead, while rates cuts are likely to be supportive for fixed income in general, markets are pricing in a reasonable amount of easing and investors are likely to need to be nimble with their duration, curve and credit market positioning given the outlook for central bank policy and event risk heading into the end of the year.
• Commodities: Gold continued to perform well, ending the quarter just shy of the all-time high set in late September and up by more than 27% year-to-date. However, unlike earlier in the year when rising prices led to outflows from gold ETPs, it appears that views on the outlook for gold are changing with net buying seen over the quarter, potentially due to geopolitical concerns. The picture for broad commodities is more mixed as energy prices fell over concerns about the economic outlook but was broadly offset by the rally in precious metals which left the broad Bloomberg Commodity Index just in positive territory for the quarter. However, easing cycles tend to be positive for commodities and, with investors generally having low exposure, further inflows could be seen in coming months as the outlook for growth becomes clearer.