Article

Q1 2024 European Demand Monitor

23 April 2024
Invesco
ETFs European Demand Monitor

Summary

European ETFs raised $47.8 billion in the first quarter of the year, a 15% increase compared to the same period in 2023. Equity products dominated inflows with 83% market share, but fixed income NNA remained strong with 25% of flows, in line with AUM share at the start of the year. It was a difficult quarter for commodities with $2.7 billion of outflows.

Overall assets under management (AUM) increased to a new high of $1.9 trillion helped by strong inflows and market-driven gains of 4.9%. ESG represents 20.1% of this industry AUM, largely unchanged over the quarter.

The outlook for ETF flows remains positive. Although expectations for rate cuts have been pushed back, this has primarily been due to the buoyant economic outlook. Nevertheless, central banks continue to signal that they are likely to ease monetary policy later this year as less restrictive policy will be needed to support growth once inflation has fallen back closer to target. This combination falling inflation, moderate growth and lower rates is likely to provide a very supportive backdrop for financial markets.

Industry ETF flows by asset class

Asset Class

2023 Y/E AUM
($m)

2024 Q1 AUM
($m)

 2024 Q1 NNA 
($m)

% Market Moves Q1 2024

Total

1,811,419

1,948,564

47,769

4.9%

Equity

1,251,555

1,378,287

39,576

7.0%

Fixed Income

432,642

435,789

12,111

-2.1%

Commodity

114,785

117,938

-2,720

5.1%

Data sourced from Invesco, Bloomberg, as at 29 Mar 2024. All figures in USD.

  • Equity AUM ended 2023 at $1.38 trillion, a new high, up 10% from the end of 2023 (itself a year end high). This increase in AUM was driven by a combination of strong inflows and a supportive market. NNA at $39.6 billion was up 73% on Q1 2023 and accounted for a third of the increase in AUM with an average market gain of 7.0% accounting for the other two-thirds.
  • Fixed income AUM increased modestly to $436 billion. Inflows of $12.1 billion offset negative market performance helping lift AUM to a new high despite the impact of higher bond yields over the quarter.
  • Commodity products dominated the outflows table with Precious Metals the main negative. Total outflows were $2.7 billion. However, continued positive returns (5.1%) meant that overall assets rose by 2.7%.
Figure 1.Net new assets as a percentage of start of year AUM – a strong quarter for fixed income and equities:

Invesco, Bloomberg, as at 29 Mar 2024. All figures in USD.

  •  

    		 2024 Q1
    AUM ($m)

    % of Current AUM

    		 2024 Q1 NNA
    ($m)
     

    % of Q1 2024 NNA

    Non-ESG

    1,557,253

    79.9%

    39,040

    81.73%

    ESG

    391,311

    20.1%

    8,729

    18.27%

    Invesco, Bloomberg, as at 29 Mar 2024. All figures in USD.

    • Inflows of $8.7 billion in ESG accounted for 18.3% of total market flows in the quarter. ESG products now represent 20.1% of industry AUM, a 0.2% decrease in market share since the start of the year.
    • Flow participation for ESG products has continued to slow in 2024, now at 18% following 29% flow capture in 2023, which itself compares unfavourably to a more significant share of flows in prior years (51% in 2021, 61% in 2022). Despite an overall dip in flow capture, now just below market share, some ESG sub-categories are still punching above their weight.
    • Funds that only screen out companies involved in negative ESG activities/controversies have proved popular this year (pulling in +$3.6b) whilst strategies that tilt weightings to achieve ESG improvements (rather than using ESG score screening) have also done well (+$2.3b), both approaches are generally considered as a lighter-touch ESG integration approach, and also saw strong asset raise last year.
    • Conversely, strict best-in-class strategies, those which screen out the majority of their investment universe, have seen very muted flows (<+$1b). Notably, these products are also the incumbents in the space, with over $100b AUM between them.
    • Climate strategies have been out of favour so far this year, having raked in almost $15b in 2023 they’ve seen just $0.4b in Q1 2024.
    Figure 2. NNA ($m): ESG vs Non-ESG ETFs

    Invesco, Bloomberg, as at 29 Mar 2024. All figures in USD.

    • At $39.6 billion, equity NNA was up by 73% compared to the $23.0 billion seen in Q1 2023. Combined with a supportive market performance over the quarter this brought Equity AUM to a record high of $1.38 trillion.
    • Global equities remained the largest contributors to inflows in 2023 with $14.8 billion, accounting for 37% of total equity flows. Inflows were extremely stable, slowing slightly in March compared to the first two months of the year.
    • US equities came a very close second with $14.6 billion of inflows. This is a marked contrast to behaviour in the first quarter of 2023 where outflows reached $2.2 billion by mid-March, and marks a continuation of the behaviour observed in the second half of the 2023. US equity flows in Q1 2024 are equal to 46% of total flows to the region seen in 2023.
    • Once again Emerging Markets received the third largest equity inflows with $2.1 billion of NNA showing renewed interest from investors after flows flatlined in the last quarter of 2023.
    • Japan and Europe saw inflows of $1.3 and $1.6 billion respectively. Japan equities saw fairly consistent inflows for much of the quarter before seeing a slight moderation at the end of the quarter as the market reached new highs on the back of renewed yen weakness. Europe started the year in outflows before recovering erratically as the quarter rolled on.
    • China equities ($0.2 billion) saw flows recover in latter part of the quarter after starting the year with outflows, continuing the story of the second half of 2023. China equities showed signs of life after a difficult period for the market, MSCI China index gained 9.4% in February and March, after dropping 29.0% over the 12 months to the end of January.
    • Thematics, the only broad equity segment with outflows in 2023, saw signs of renewed interest with $1.3 billion in the quarter. Rising yields were a significant headwind in 2023 for these growth-focused strategies. As we move closer to period of policy loosening it appears that investors are looking again at the thematic space.
    • Smart Beta (-$0.9 billion) was the only broad segment with outflows in the quarter. Selling was primarily focused in February with the greatest outflows from Value and Low Vol strategies.
    Figure 3. NNA ($m): Equity ETF flows:

    Invesco, Bloomberg, as at 29 Mar 2024. All figures in USD.

    • While equity ETFs dominated NNA for Q1, the $12.1 billion of net inflows into fixed income ETFs represents 25% market share, slightly above their market share by AUM.
    • With $4.2 billion NNA, developed market government bond ETFs were the strongest category for the quarter. ETFs focusing on very short-dated US Treasuries (<1 year), however, accounted for $2.4 billion which, when combined with cash management being the second strongest category for NNA ($2.9 billion) over the quarter, indicates investors did not view interest rate risk as being attractive following the strong rally into the end of 2023.
    • A deeper dive into government bond flows, however, shows a divergence of views between US and eurozone exposures. For US Treasuries, in addition to strong inflows into sub-1-year Treasuries, there were outflows from ETFs focusing on longer maturities, indicating investors actively shortening duration. On the other hand, there were net inflows into longer dated eurozone government bond ETFs and net outflows from ETFs focused on sub-5-year maturities as it appears likely that the eurozone interest rates are likely to be cut before those in the US.
    • High yield had a strong quarter with NNA of $2.4 billion, of which three quarters went into EUR-denominated ETFs, while investment grade credit had a rollercoaster ride during the period, initially experiencing strong inflows before net selling during February and March left NNA close to flat for the quarter.
    • There was ongoing interest in fixed maturity ETFs – a relatively new category having only seen the first launches last September – which took in a further $1.1 billion.
    • Emerging market debt (including pure China Bond exposure) ETFs remained out of favour, experiencing outflows of $1.3 billion.
    Figure 4. NNA ($m): Fixed income ETF flows

    Invesco, Bloomberg, as at 29 March 2024 in USD.

    • Commodities continued to experience net outflows during the quarter with net sales totalling $2.7 billion.
    • Gold ETCs saw the heaviest net selling with outflows of $2.9 billion as the gold price remained above $2,000 per ounce for most of the quarter and then rallied strongly in March to hit new all time highs and ending the quarter at $2,230. Silver ETCs, however, did see net inflows of $0.9 billion.
    • Other single commodity ETCs also came under pressure with net sales of $0.6 billion. Oil ETCs were the main driver with outflows of $1.0 billion, while Copper ETCs saw inflows of $0.3 billion.
    • Flows into broad commodity and smart beta products were subdued over the quarter. 
    Figure 5. NNA ($m): Commodity ETP flows

    Invesco, Bloomberg, as at 29 March 2024 in USD.

Outlook for ETF flows in Q2 2024

With NNA of $47.8 billion in the first quarter, net inflows into EMEA ETFs were up by more than 15% relative to the first quarter of 2023, which turned out to be the second strongest year on record for NNA at $159 billion and signs for the rest of the year appear positive. While macroeconomic data confirmed that markets had got ahead of the curve in expecting imminent rates cuts at the end of last year, central banks continue to indicate that they expect to ease monetary policy over the course of the year. However, the previous aggressive tightening appears to be achieving its desired effect of bringing inflation back towards target, but without driving the global economy into a recession. While developments through the year will need to be monitored closely, the combination of falling inflation, moderate growth and lower rates is likely to provide a very supportive backdrop for financial markets.

  • Equities: Equities started 2024 strongly, continuing the positive performance seen in 2023 with the MSCI World index posting an 8.9% gain (in USD). US and Japan equities continued to lead the market with >10% gains in USD terms, and close to 20% for Japan equities in yen. European and EM equities continued to lag with returns of 5.2% and 2.4% respectively. Performance for the rest of the year is likely to continue to depend on the evolution of growth, inflation and interest rates. A bumpier landing or higher inflation is likely to favour perceived safe-haven exposures such as global or US, a softer landing may help support appetite for more cyclical markets. Questions over concentration in markets, driven by the strength of mega cap tech stocks, are also likely to persist, equal weight outperformed the standard market cap weighted S&P 500 index in March having underperformed in earlier part of the quarter. Finally, we expect there will continue to be demand for ESG and, with bond yields likely to decline, we may see a return of interest in thematics.
  • Fixed income: Having rallied strongly into year-end, bond markets gave back some gains early in 2024 as a combination of stronger data and central bank commentary pushed back rate expectations. Central banks, however, continue to indicate that they expect to cut rates later in the year as inflation falls towards target and less restrictive policies will be required to support growth. With yields across many bond markets currently close to the best levels seen in 15 years and the more dovish rate outlook, fixed income is primed to perform well for the rest of the year which should drive further inflows.
  • Commodities: Gold ended the quarter at a new all time high of $2,230 per ounce and the rally has been accompanied by selling of gold ETPs. Geopolitical tensions remain elevated and central banks were strong buyers last year, which if continued, could support gold at or above current levels which is unlikely to be a positive environment for gold ETP flows. However, gold still warrants an allocation in a multi asset portfolio given its diversification and inflation hedging properties. Broad commodities performed poorly early in the quarter but rallied from mid-February and could see inflows provided the outlook for growth remains positive.  

Related insights

Investment risks

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Important information

  • Views and opinions are based on current market conditions and are subject to change. All data is provided as at 31 March 2024, sourced from Invesco unless otherwise stated.


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