European ETFs attracted €28.1bn in the second quarter of 2023, down from €38.9bn in the first three months of the year, according to Morningstar Research data.
Assets under management in ETFs and ETCs, however, continued to grow from €1.4trn in Q1 to €1.5trn in Q2. Of these, 68% were invested in equities, 23% in bonds and 7% in commodities.
The slowdown in flows was largely driven by lower appetite for equity market exposure, Morningstar Research found. Despite this, flows into equity ETFs remained positive over the period at €12.7bn, though down 42% from Q1.
Standalone US large-cap blend and Japanese large-cap equities attracted the most interest over the quarter, with inflows of €2.9bn and €2.2bn, respectively.
Value-focused equities was the category which suffered the most, with Q1 disinvestment continuing into the second quarter, during which €1.1bn was pulled from energy sector equity ETFs due to a fall in valuations.
European equity ETF AUM surpasses €1trn for first time
By contrast, flows into bond strategies increased in Q2 to €16bn from €15.1bn in the first three months of 2023.
Overall, bond ETF inflows for the first half of the year reached an all-time high, Morningstar Research said, as investors sought to take advantage of increasing bond yields and tackle portfolio imbalances arising from being underweight in fixed income for several years.
Assets in fixed income ETFs grew to €343bn from €328bn, meaning the quarterly increase was "entirely driven by flows", the firm said.
It added: "Investors favoured core all-maturity exposures, both government and corporate. The increase in interest rates has been a game changer.
"Before the start of the tightening cycle, there was no yield of significance in fixed income markets other than in high-yield bonds, which many investors were reluctant to go into on concerns of loading up their portfolios with excessive credit risk. Now there is attractive yield to be found in safer areas of the bond market."
ESG ETFs suffered a drop in flows to €10bn in the second quarter, down from €10.7bn in Q1. Similarly to equity ETFs, however, their AUM kept increasing from €270bn in Q1 to €289.3bn in Q2.
Global ETF flows remain steady in May
The data provider said the 2023 "flows story" for ESG-focused strategies has so far showed a slowdown in their take-up compared to previous years. In 2022, 65% of total flows into European ETFs went to ESG products, while in 2021, the same was true for 53% of flows.
Commodity ETCs and ETFs suffered significant outflows over the quarter (€2.4bn) more than offsetting the €1.3bn of inflows in Q1. Assets also decreased by €6.9bn to €103.4bn over the period, meaning the Q2 drop was driven by outflows and capital depreciation.
Within the category, precious metals suffered the biggest outflows over the second quarter of €1.6bn, continuing an already existing trend which saw €2.1bn being pulled in Q1.
Morningstar Research explained: "It may be that investors are becoming confident about the central banks' management of the inflationary outlook and no longer feel the need to seek hedges against rising prices. In fact, this would tie in with the noted lack of interest in inflation-linked bond strategies."
Thematic ETFs reported inflows of €160m - down from €800m in the first quarter - with assets rising slightly to €33.6bn in Q2 from €33.2bn in Q1 2023.
The biggest winner over the period was iShares, which attracted €15bn in Q2, and its net assets grew to €661bn - representing 44.5% of the European ETF market. The figure still marked a drop from the €19bn of inflows in Q1, however.
The bulk of inflows to iShares in the second quarter (€11.3bn) went to fixed income ETFs, an area where BlackRock, owner of iShares, holds 58.3% of the market.
Amundi, Xtrackers and Vanguard also reported positive flows over Q2, while Invesco, WisdomTree, UBS and State Street suffered outflows.
