Cerulli Associates’ latest report, European Passive Investments 2021: Achieving Success in a Growing Segment, shows that the European passive fund market has grown rapidly in recent years, driven by retail investors’ increasing adoption of the exchange-traded fund (ETF) wrapper, institutional investors’ continued use of index funds, and new regulation. In addition, the region’s investors are becoming more cost conscious, driving interest in cost-effective options.

Germany is set to experience the highest level of passive ETF growth in Europe: 70% of the ETF issuers Cerulli surveyed expect such products’ assets to grow quickly in the country. France is expected to see the second-highest level of passive ETF growth: 68% of survey respondents expect passive ETF assets to grow quickly in the country.

“In Europe, index funds are used predominantly by institutional investors, which are expected to remain the biggest users of such products over the next two years,” says Fabrizio Zumbo, associate director. “Many index fund providers are confident that retail clients’ adoption of index funds will increase gradually, but we believe providers should plan to allocate more resources to financial education and marketing campaigns.”

Environmental, social, and governance (ESG) products are expected to experience high demand across both the ETF and index fund sectors. For example, 76% of the index providers Cerulli surveyed anticipate significant demand for ESG index fund products in Switzerland over the next 12 to 24 months. The bulk of ESG passive funds—both index funds and ETFs—are currently held in equity products, although demand for fixed-income products continues to expand. Of the index fund providers surveyed across Europe, 82% expect an increase in demand for emerging and developed market fixed-income products over the next two years.

In addition to ESG, European passive investors are increasingly interested in thematic investing. More than a quarter (28%) of the asset managers Cerulli surveyed expect the thematic ETF market to grow rapidly over the coming 12 to 24 months and 37% anticipate moderate growth.

“Around half of the ETF issuers believe that rising interest in thematic investing runs parallel to the urgent need to tackle the serious issues facing the planet,” adds Zumbo. “During 2020, European investors put sustainability and social responsibility at the core of their investment approaches. As a result, the ESG product landscape has evolved rapidly, with asset managers and ETF issuers developing highly specialized offerings for passive investors.”

In terms of themes, 29% of the ETF issuers Cerulli surveyed expect renewable energy to attract the most client interest over the next 12 to 24 months. A further 26% of respondents expect climate change more widely to be the most important theme over the coming two years.