Cerulli Associates’ latest report, European Passive Investments 2022: Fresh Opportunities for Growth, shows that emerging markets offer opportunities for exchange-traded fund (ETF) issuers and index fund providers that can build compelling propositions. Investors will be looking to find managers that combine a positive track record with robust on-the-ground research teams to create attractive investment cases.

Net new flows into passive emerging market products have remained positive so far this year, despite risk-off sentiment and the high level of outflows from other segments of the European fund market.¹Emerging market ETFs gathered €1.9 billion in 1H 2022, after collecting a record €15.6 billion last year. Emerging market index funds had registered net sales of €7.7 billion as of June 2022, compared to €12.3 billion in 2021 and €10.6 billion the previous year.

“Appetite for emerging market exposure in Europe continues to vary by market,” says Fabrizio Zumbo, director of research at Cerulli. “More than half of the providers we surveyed expect the U.K. to be the primary driver of future demand for emerging market ETFs, followed by Switzerland and Germany.”

Nearly half (46%) of the ETF issuers across Europe believe that Asia represents the most attractive opportunity in emerging markets when it comes to gathering new client assets and 94% of index fund providers agreed. Two-thirds (66%) of ETF issuers believe that clients will increase their allocations to China over the next 12 to 24 months. Expectations are more muted in the index fund space, perhaps because fewer China-specific products are currently available than in the ETF space.

Almost two in five (39%) ETF issuer respondents expect China to be the number-one source of client demand over the next 12 to 24 months when it comes to emerging market investing. More than one in five (21%) expect India to attract local investment interest.

“Although the outlook for passive emerging market products is generally positive, many market participants warn that the current macroeconomic and geopolitical picture is deterring client investment in the space—at least in the short term,” adds Zumbo. “Others remain concerned about the environmental, social, and governance credentials of emerging markets in the medium term.”

Almost two-thirds (63%) of the ETF issuers Cerulli surveyed said that changes to indices will be a key catalyst for greater investment in emerging market assets. Addressing the current lack of investment may require action on the part of index providers such as MSCI.

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¹ Source: Morningstar