2020 marks the 20th anniversary of the first Exchange Traded Fund (ETF) listing in Europe, and signs are pointing to a landmark year for the market.
Preliminary data published by ETFGI this month showed that the European Exchange Traded Product (ETP) market, including funds and commodities, had surpassed the trillion-dollar mark in assets for the first time at the end of 2019.
While the market has grown significantly in recent years it is still dwarfed in comparison to the US where over $4.4 trillion is tracking ETPs. Looking ahead to this year, we expect to see wider adoption of ETFs by both institutional and retail clients, especially as more wealth managers and private investors embrace the advantages that ETFs offer.
We also see an expansion of the variety of products, asset classes and geographic reach available through ETFs as a positive growth trend. Last year, nearly 200 new ETPs were listed on London Stock Exchange and the most active ETPs on the exchange covered a range of strategies, from the S&P 500 to gold to emerging markets bonds. Importantly, there has been substantial growth in the trading of ETPs and tightening of spreads—the biggest day of the year saw £846m traded on London Stock Exchange, more than double the average daily turnover £407m.
We have also seen further capital inflows and trading volumes in bond ETFs growing in 2019 with these investment products gathering the largest net inflows last year. There are now 350 fixed income ETFs listed on London Stock Exchange, with 63 of these listing in 2019. A growing number of investors have found ETFs to be useful tools during times of volatility, and a low interest rate environment.
Many index providers, such as FTSE Russell, have also expanded their fixed income index offerings, to include a wide range of market segments across credit quality, sector and region.
The structure of ETFs provides easy access to broad fixed income markets via a single trade on an exchange, offering instant diversification relative to individual bond investing via a limited retail bond market.
As investors seek to integrate a sustainable investment philosophy into their passive strategies, demand for ESG ETFs will continue to increase in 2020. 77 ESG-related ETFs chose to list in London, recording a total traded value of £732m in 2019, up 102% year-on-year. ETFs are an efficient way to access the green economy and grow ESG equity and bond portfolios.
Not only does the green economy represents 6 per cent of the market capitalisation of global listed companies, approximately $4 trillion, more than 450 companies globally have committed to setting science-based targets in line with the Paris Agreement.
The green economy is also producing results, with FTSE Russell sustainable indexes outperforming their underlying benchmarks over the last five years. As the European ETF market and passive investment strategies continue to grow in popularity and increasing focus on liquidity and being able to trade intra-day, we can expect to see more financial advisors and wealth managers explore the use of ETFs to offer diversification, liquidity and transparency to investors.
If you’d like to find out more about ETFs, London Stock Exchange has a dedicated online resource as well as a full database of all the ETFs available on its markets. Visit: www.lseg.com/etfs