European ETFs survive Covid-19 redemption test
Liquidity fears dispelled, but launches hit three-year low
28 May 2020 | The Asset

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 a recent report.

The report by Cerulli Associates notes that the market for these products has been steadily growing 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.

And 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 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.

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