European ETFs Survive the Redemption Test
May 27, 2020 — London
Coronavirus panic dispels liquidity fears, but launches dry up
The COVID-19 pandemic has eased, if not totally dispelled, long-standing worries that Europe’s exchange-traded fund (ETF) sector would buckle in the event of mass redemptions, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.
The market for these products has been steadily growing both in terms of size and popularity among investors since Europe’s first ETF was launched on Deutsche Börse on April 11, 2000. In the two decades since then, ETF innovation has blossomed.
Research from Cerulli Associates suggests that the growth of European ETFs seemed unstoppable. “The vehicles promised investors a cheaper, more transparent, and more efficient way to gain exposure to investment themes and asset classes than many mutual funds,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli. “However, there were concerns that ETF liquidity was yet to be truly tested, given that the bull market environment had been so prolonged.”
The test came in March, when the market experienced record high outflows of €21.9 billion (US$24.0 billion), according to Morningstar figures, which include both active and passive ETFs. Investors pulled money from ETFs as COVID-19 became a global concern and stock markets plunged. Assets under management (AUM) also plummeted, falling a record 13% from €899 billion in February to €781 billion in March. Yet, the ETF sector passed the test.
“There is now evidence that ETFs, including fixed-income ETFs, can withstand significant redemptions during times of exceptional volatility,” says Zumbo, noting that the ability of ETFs to continue trading in Europe, even while outflows topped €21 billion, is in part down to the secondary market on which they trade. Many of the transactions that took place in March were between buyers and sellers of existing shares, meaning there was no need to impact the primary market.
Although worries about fixed-income ETFs remaining liquid proved to be unfounded, there were instances of price dislocations among bond ETFs at the height of the market volatility. Since then, discounts have narrowed or normalized. In April, the latest figures show investors returning to ETFs, with positive flows into the European market once again.
The number of ETF products being brought to market in Europe has been slowing and launches hit a three-year low during the first quarter of 2020.
- Active bond funds were especially hard hit in March, suffering heavy outflows of €153 billion. The lockdown and associated pause in corporate activity impacted profits and therefore appetite for corporate bonds—investors have become increasingly skeptical of the ability of highly indebted companies to service their liabilities.
- The coronavirus pandemic affected global markets in the first quarter. Equities suffered steep declines and government bond yields fell as investors favored their perceived safety. The global equity sector suffered net outflows of €13.7 billion in March, taking year-to-date net outflows to €10.1 billion. Both passive and active managers registered net outflows in the month, but active funds were hardest hit. The sector's total AUM fell to €825.5 billion, their lowest level since January 2019.