The
European
exchange-traded
fund
(ETF)
market
has
closed
the
second
quarter
of
the
year
with
flows
of
€53
billion
(£44.5
billion),
the
highest
on
record.
In
the
first
half
of
the
year,
investors
poured
€98
billion
into
ETFs,
paving
the
way
for
a
record-breaking
year
for
the
investment
vehicle.
I
purposely
say
investment
vehicle
rather
than
passive
strategy.
This
is
because
ETFs
can
no
longer
be
identified
solely
as
index-tracking
strategies.
Indeed,
active
ETFs
have
been
making
plenty
of
headlines
lately,
and
in
the
first
half
of
the
year
over
€6.1
billion
of
flows
(6.3%
of
total
flows
into
ETFs)
were
invested
in
them.
Yes,
they
represent
a
tiny
minority,
but
it
is
a
growing
area
of
the
market.
So,
if
you
still
equate
ETF
with
passives,
it’s
time
for
a
rethink.
What
Are
ETF
Buyers
Investing
in?
In
terms
of
broad
asset
classes,
the
bulk
of
money
–
€40.5
billion
–
in
the
second
quarter
went
into
equity,
mainly
to
funds
with
a
heavy
US
large-cap
market
bias.
The
US
equity
market
experienced
a
poor
start
to
the
second
quarter
because
of
a
higher-than-expected
inflation
reading
in
April.
But
it
then
bounced
on
ongoing
enthusiasm
for
technology
stocks
to
close
the
quarter
in
positive
terrain.
Investors
have
ridden
the
positive
momentum
of
the
US
equity
market
both
via
global
large-cap
equity
ETFs,
where
the
US
is
by
far
the
largest
geographical
exposure,
accounting
for
65%-70%
of
a
typical
portfolio,
as
well
as
single
US
equity
ETFs
that
track
well-known
indices
such
as
the
S&P
500.
In
the
case
of
single
US
equity
market
exposure
in
particular,
the
dominance
of
passively-managed
money
is
entrenched
by
now.
Despite
an
element
of
foreign
exchange
risk,
US
equity
exposure
is
a
core
long-term
holding
for
European
investors.
But
this
is
a
market
where
the
long-term
rate
of
success
of
active
managers
(that
is,
their
ability
to
generate
returns
above
a
standard
benchmark)
is
very
poor.
Investors
have
long
woken
up
to
this
reality
and
have
made
low-cost
passive
funds
the
go-to
option
to
allocate
money
for
this
market
exposure.
So,
it’s
unsurprising
to
see
such
solid
flows
almost
every
quarter
into
these
–
yes,
in
this
case,
standard
passive
–
ETFs.
In
fact,
three
S&P
500
ETFs
from
iShares,
SPDR
and
Invesco
are
amongst
the
top
five
money-gathering
ETFs
in
the
second
quarter,
and
two
of
them,
the
iShares
Core
S&P
500
ETF
and
the
SPDR
S&P
500
ETF,
both
with
a
Medalist
Rating
of
Gold,
top
the
flows
league
in
the
first
half
of
the
year.
Can
You
Invest
in
Bond
ETFs?
Yes.
Bond
ETFs
gathered
€11.7
billion
of
flows
in
the
second
quarter,
up
from
€9.2
billion
in
the
first
quarter.
Central
banks
sent
messages
to
tone
down
expectations
for
a
speedy
delivery
of
multiple
rate
cuts.
This
favoured
ongoing
flows
into
short
and
ultrashort-dated
bond
ETFs,
which
are
typically
used
as
liquidity
management
tools.
Commodity
products
recorded
outflows
of
€2.1
billion.
This
was
the
fifth
consecutive
quarter
of
disinvestment,
so
it’s
difficult
not
to
establish
a
direct
relationship
between
these
outflows
and
inflation
trends.
This
is
a
segment
of
the
ETF
market
that
is
overwhelmingly
dominated
by
products
that
provide
exposure
to
gold.
And
yet,
despite
the
ongoing
upside
to
gold
prices,
investors
have
been
mostly
selling
out.
This
seems
to
indicate
that
exposure
to
gold
has
been
primarily
used
as
an
inflation
hedge.
As
inflation
pressures
have
waned,
so
has
the
interest
to
remain
invested
in
the
yellow
metal.
The
ETF
flows
story
showed
ongoing
declining
interest
in
ESG.
Flows
into
ESG
ETFs
totalled
€4.7
billion
in
the
second
quarter,
down
from
€7.6
billion
in
the
first
quarter
and
represented
just
9%
of
total
flows
into
ETFs,
down
from
17%
in
the
first
quarter.
The
decline
in
interest
for
ESG
investments
from
the
highs
of
2020-22
has
been
particularly
steep
in
the
equity
space
where
the
bulk
of
assets
and
product
offerings
resides.
Jose
Garcia
Zarate
is
associate
director
of
passive
strategies
in
the
Morningstar
manager
research
team
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