Q2 2024 European ETF Demand Monitor

• At $84.3 billion, NNA for the first half is more than twice the level seen in the first half of 2023. Combined with a strong market return Equity AUM hit new all-time highs in Q2, ending the quarter at $1.45 billion.
• Once again, global equities remained the largest contributors to inflows in the quarter with $13.4 billion, slowing slightly compared to Q1 to give $28.1 billion NNA in the first half of the year and accounting for a third of total equity flows YTD.
• US equities came a very close second with $13.2 billion of inflows in the quarter and $27.8 billion for H1. Flows into products tracking the S&P 500 dominated the flows into US equity exposures with $23.8 billion of NNA in the first half of the year, the next most successful benchmark with $3.2 billion of NNA.
• European equities saw a surge of interest in Q2 with $4.9 billion of NNA in the quarter, more than a four-fold increase in flows compared to the first quarter giving total inflows YTD of $6.1 billion. This made the region a comfortable third place in equity flows for the quarter and the half year.
• Japan saw a continuation of inflows in Q2 with $1.8 billion of inflows bringing H1 NNA to $3.4 billion. This is meaningful improvement in flows compared to last year when the region saw $1.3bn of inflows in total.
• Emerging Markets saw a slowing of flows but shrugged off outflows in April to reach $1.2 billion of NNA in Q2, compared to $2.3 billion in Q1. The pushing back of expectations for looser policy and ongoing weakness in China were both potential headwinds for investor appetite towards products exposed to the broader EM space. Appetite for dedicated China equity ETFs also remained modest with $0.3 billion NNA in the quarter, albeit this marked a doubling of inflows compared to Q1 for the market and market a recovery after outflows in April.
• The pushing back of rate cuts also weight somewhat on Thematics, the only broad equity segment with outflows in 2023, the segment also shrugged off outflows in April to reach $1.2 billion NNA in Q2, and $2.5 billion for the first half of the year.
• Smart Beta (-$0.4 billion) was the only broad segment with outflows in the quarter albeit improving on the $0.9 billion of outflows in Q1. Selling was primarily focused in April with positive flows in May and June.

• Although the $16.1 billion of net inflows into fixed income ETFs was 19% lower than the same period last year, at 28% of the total, fixed income NNA still punched above it by market share. 
• The key theme seen in the first quarter continued, with flows favouring the safe haven asset classes of developed market government bonds and cash management representing 83% of fixed income NNA over the quarter. 
• With $8.7 billion in NNA, developed market government bond ETFs were the strongest category over the quarter. Although the split between US Treasuries ($4.2bn) and Euro government bonds ($3.8bn) was equal, it’s worth noting that $2 billion of the 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 $4.3 billion of net inflows. Fixed maturity ETFs also experienced further demand with NNA of $1.4bn, potentially as a substitute for cash management as investors look to lock in yields currently available ahead of anticipated rate cuts later in the year.
• Interestingly, having been out of favour recently, flows into both EM debt and inflation bounced during the quarter with NNA of $0.6 billion and $0.5 billion respectively.
• Credit ETFs saw outflows across both investment grade (-$0.9bn) and high yield (-$0.4bn), in keeping with the theme towards higher quality, lower risk fixed income.

• Commodities continued to experience net outflows during the quarter with net sales totalling $2.5 billion, although there were some positive signs towards the end of the quarter as NNA for June was positive.
• Gold ETCs saw the heaviest net selling with outflows of $2.1 billion as the gold price hit several new all-time highs during the quarter. However, a pull back from the highs in June to the lower end of the recent range did see some buyers return to the market.
• Platinum had an unusually strong quarter with $0.4 billion NNA, potentially driven by higher anticipated demand for catalytic converters following a slowdown in the pace of consumers switching from combustion engines to fully electric vehicles, largely in favour of hybrids.
• Other single commodity ETCs experienced net sales of $0.9 billion, almost entirely driven by sales of copper as prices spiked above $10,000 per tonne.
• Broad commodity products took in $0.4 billion over the quarter. 

Outlook for ETF flows in Q3 2024

With NNA of $106.6 billion in the first half of the year, net inflows into EMEA ETFs were up by 46% relative to the first half of 2023, and only just behind the $112.0 billion seen at the halfway point in 2021, which turned out to be the strongest year on record for EMEA ETF inflows with a total of $192.9 billion NNA.

Although the timing of rate cuts was pushed back earlier in the year, central banks have continued to signal that the next move will be lower once they are comfortable that inflation is under control. Indeed, towards the end of the quarter, the ECB cut rates ahead of both the Federal Reserve and Bank of England, although they signalled that further easing would be gradual. Although bond market returns remained subdued over the quarter, the outlook for a combination of steady growth and easier monetary policy helped to spur on equity markets with several key US equity indices hitting new all-time highs during the quarter. While the macroeconomic backdrop remains supportive for financial markets generally and should continue to lead to strong demand for ETFs in the second half of the year, political and geopolitical risks remain. Both the war in Ukraine and the Israel-Hamas conflict are ongoing with the latter having the potential to lead to further instability in the Middle East. Meanwhile, rather than providing a more stable outlook, the snap election in France appears likely to lead to increased uncertainty in coming months while the focus for the second half will be the US presidential election in November, particularly following increasing concerns about whether Biden will be the democrat candidate.

• Equities: Equities began Q2 on the back foot with MSCI World index dropping more than 5% in the first few weeks of April, but performance recovered to end the quarter up 2.6% (in USD) with equity markets making new highs late in the quarter. The US equity market continued to lead within developed markets, up 4.0%, but with increasing concentration in the drivers of market returns, only 40% of stocks in the S&P 500 had a positive return in June, despite the market gaining 3.6% in the month. EM equities also gained over the quarter, eclipsing the US with a 5% return. However other developed market regions continued to lag. Japan equities gained only 1.8% in local currency terms, helped by the ongoing weakening of the yen in the quarter, however currency weakness means that an unhedged USD investor saw -4.3% return. European equities returned only 0.55% in USD. Questions over concentration in markets, driven by the strength of mega cap tech stocks, are likely to persist, we have seen modest flows returning to equal weight approaches as the performance gap has widened. Delivery of easier monetary policy in the second half of the year may prompt investors to look again at some of the other unloved parts of the market with thematic exposures a potential beneficiary.
• Fixed income: Bond market returns remained subdued during the second quarter as sticky inflation led to central banks indicating that they were in no rush to cut rates. Credit markets generally performed better than government bonds which was mainly driven by carry as spreads gave back earlier tightening into quarter end on the back of heightened political risks. However, with only a shallow easing cycle now priced in, rates cuts are likely to be supportive for fixed income in general, although investors are likely to need to be nimble with their duration, curve and credit market positioning given event risk during the second half. 
• Commodities: Gold hit several new all-time highs early in the quarter, primarily driven by central bank demand, which caused outflows from ETPs. However, a small pull back in June was accompanied by ETP buying, potentially indicating that investors may now be anticipating that gold will trade in a higher range with support likely to come from easier monetary policy, continued central bank demand and heightened political risks. Meanwhile, Platinum ETPs had a particularly strong quarter for inflows with the slower adoption of fully electric vehicles likely to continue to support prices in coming months. Returns for broad commodities were mildly positive for the quarter having given back much of the earlier gains. Nevertheless, easing cycles tend to be positive for commodities and, with investors generally having low exposure, further inflows could be seen during the second half of the year.