European exchange traded funds have attracted greater net flows than open-ended funds every month this year, a trend experts say is part of a long-term shift towards passive investment.

Open-ended funds have suffered outflows every month from February to August, while ETFs have recorded inflows every month except June and July, according to Morningstar Direct data.

ETFs brought in €52bn of flows from the start of the year, while open-ended funds have seen outflows of €141bn in that time.

Trend towards passive investment

Open-ended funds had previously attracted greater flows than ETFs every month since April 2020.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, says the difference in flows between ETFs and open-ended funds is part of a gradual movement towards passive investment.

“ETFs as a wrapper are widely considered to be superior,” he says.

“They’ve sailed through Covid and other crises, which strengthened their case when there were question marks about how these funds would work under certain conditions.”

He adds that the difference in flows could be seen as something of a vote of no confidence in active managers.

“One of the supposed benefits of active managers is their ability to prove their worth in a bear market,” says Mr Lamont.

Ralph Williams, associate director of Europe, the Middle East and Africa insights at Broadridge, says positive ETF flows stem from a reaction to this year’s market turmoil, the market performance of commodities and a longer-term trend of passive funds gaining market share.

“ETFs are generating growing interest among retail investors thanks to attractive pricing,” he says.

Industry shifting

Michael O’Riordan, founding partner of ETF consultancy Blackwater Search and Advisory, says the difference in flows comes down to cost and convenience, even in difficult market conditions.

“Every time there are turbulent markets we see the same thing, outflows in mutual funds, even though mutual fund managers always preach that in times of choppy markets it’s best to be in active mutual funds,” he says.

“I guess investors disagree with that sentiment, if the numbers are anything to go by.”

Mr O’Riordan adds that he is surprised there are not more mutual fund managers looking to launch an ETF strategy in Europe.

“It is clear that the industry is shifting, so why not look to position yourself for that and avail of the opportunity,” he says.

“Instead they choose to bury their heads in the sand and stick with a technology that has been around for over 50 years rather than adapt with the times.”

Advantages of the ETF wrapper

Franklin Templeton, Axa Investment Managers and Fineco Asset Management have all recently entered the European ETF market, while AllianceBernstein is planning to do so having recently launched its first ETFs in the US.

Andrea Murray, head of business development at Blackwater Search and Advisory, says she thinks the industry will continue to see strong sales of ETFs compared with open-ended funds.

“We absolutely expect this to continue as investors become more aware of the advantages of the ETF wrapper through ease of trading in volatile markets, lower cost structure and the diversification across all asset classes,” she says.

“This is not the old active versus passive debate – this is the evolution of investors opening their eyes to the benefits of having both products within the portfolio allocation and catching up to other markets, like the US, which have fully embraced the ETF wrapper for years.”