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2018: ETFs Endure In Challenging Times

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This week, Marlène Hassine Konqui, Head of ETF Research at Lyxor, fields questions about how ETFs fared this past year and what lies ahead.

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2018: ETFs Endure In Challenging Times

What was the overall picture of ETF flows in 2018?

 In a chaotic year with uncertainties of all kinds on the rise, worldwide ETF flows dropped considerably from their 2017 record highs. Yet in Europe, active managers suffered most, allowing passive flows to significantly narrow the gap with their active peers. Passive flows posted their third highest level in terms of NNA , right after 2017 and 2015, showing their resilience in turbulent markets with nearly all asset classes closing 2018 in negative territory.

How did investors allocate flows among the various asset classes in the European market?

Among equities, the only winners were US equities where inflows rose by 54%, while eurozone equity ETFs were harmed by specific economic and political uncertainties. In fixed income, government bonds was the only category that saw increased inflows compared with 2017, as government bonds played the role of safe havens amid fears of trade wars and rising geopolitical tensions.

What to expect in ETF flows in 2019 ? 

Lower economic growth should lead to slightly lesser flows into developed market ETFs. We expect the rotation toward emerging markets to continue, as long as the Fed maintains its dovish stance. Smart beta AUM should grow in a more mature phase of the cycle and increasing volatility.  ESG products should continue to benefit from growing investor interest. In the fixed income space, demand for inflation-linked ETFs should endure given the medium term inflation outlook.