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Apr 17, 2023

ETF investors warm to emerging markets, finds Morningstar

Europe’s ETF industry bolstered by equity-market gains in Q1 2023

Emerging markets proved a major pull for Europe’s ETF investors in the first quarter of 2023 amid growing optimism about the Chinese economy, according to a new report from Morningstar.

Between January and March, ‘global emerging markets equity’ was the top fund category for ETF equity inflows, bringing in €7.22 bn ($7.93 bn) in assets. In addition, two China-specific categories made it into the top 10.

Forbidden City, Beijing, China
Forbidden City, Beijing, China | Photo: Rafik Wahba

Data focused on individual funds tells a similar story. Of the top 10 equity ETFs by inflows, four are focused on emerging markets and one on the China A-shares market.

During the quarter, investors ‘welcomed China’s scrapping of its zero-Covid policy, as this was the key factor preventing the Asian giant from fully reopening its economy,’ write Morningstar analysts.

Overall, Europe’s equity ETFs attracted €21.1 bn in the first quarter of the year, a rise from €13.8 bn in the last three months of 2022, finds Morningstar data.

The increase was ‘driven by the rebound in equity markets,’ says the data provider, with markets like Germany and France recording double-digit gains over the period.

Strong themes

Thematic ETFs, which focus on a particular area such as renewable energy or cloud computing, also had a good start to the year.

This product category recorded €800 mn in inflows during the first quarter, a big jump from the €200 mn witnessed in the previous quarter and the highest level since the final three months of 2021, says Morningstar.

‘In terms of broad themes, ETFs in the physical world grouping captured 50 percent of the quarterly flows, with the other half split evenly between ETFs in the social and technology groupings,’ write analysts.

‘In terms of individual funds, there was strong demand for the JPMorgan Carbon Transition Global Equity ETF.’

ESG ETFs, meanwhile, saw €10.4 bn of inflows in the first quarter, a notable drop from €14.9 bn in the previous quarter, says Morningstar.

‘As a proportion of total flows into ETFs in the quarter, the amount invested in ESG products accounted for 27.2 percent,’ says the report. ‘This was a strong decline from 55 percent in the previous quarter.’