Nearly half (46%) of the European private banks and independent wealth managers that Cerulli Associates surveyed expect demand for smart beta exchange-traded funds (ETFs) to increase over the next 24 months, according to the latest issue of The Cerulli Edge―Europe Edition.

“Forty-four percent of the respondents to our research expect passive ETF demand to increase over the next two years,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli.

Cerulli’s research also indicates that European private banks’ average portfolio allocation to ETFs is set to increase from 18.0% in 2020 to 25.7% by 2022 and that specific sector/country exposure is by far the most important consideration for these institutions when evaluating ETFs.

“There have been some interesting developments away from the mainstream asset classes. For example, some notable differences emerged when Cerulli asked European private banks and independent wealth managers to identify what they expect to be the most in-demand passive fund strategies and exposures,” notes Zumbo. “EUR bonds were the clear winner among private banks, with almost half as many references again as USD bonds. In contrast, wealth managers expect other bond strategies to be most popular, with little to choose between their expectations for thematic, corporate, and emerging market bonds.”

The COVID-19 pandemic-related market turmoil provided a significant stress test of the resilience of bond ETFs and their success triggered interest from investors who had not previously considered using ETFs in fixed income. In addition, a combination of regulatory tailwinds and unprecedented client demand has led to a surge in environmental, social, and governance (ESG) investing.

ETFs are also becoming an area of innovation in investment strategies, with thematic approaches that focus on sustainable food sources or specific climate change criteria, for example, being released in ETF format by default.

Other Findings:

• The clients of wealth managers in Europe are showing increasing interest in ESG investing and are seeking more sophisticated ESG products. Client interest in developed market ESG equity will grow further, according to 64% of the private banks Cerulli surveyed, and interest in other asset classes is also growing. For example, 52% of the private banks we surveyed expect their clients’ interest in emerging market ESG equity to increase.

• Historically low bond yields, buoyant stock valuations, and impending inflation are making the hunt for yield increasingly difficult. In response, high-net worth investors are showing greater interest in private debt, private real estate, and private equity. More than 60% of the clients of the independent wealth managers Cerulli surveyed see income generation as “very important” and nearly half (46%) of private bank clients agree.