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Jan 18, 2021

Record growth for thematic ETFs in Europe

Funds tracking technology and decarbonization take lion’s share of inflows

European ETFs that track a particular trend saw substantial growth in 2020 as investors bet big on clean energy and technology, according to new research from Morningstar. 

Last year, thematic ETFs in the region attracted a record €9.5 bn ($11.5 bn) in net inflows, while assets under management rose from €8.2 bn to an ‘all-time high’ of €22.7 bn, says the data provider.

Around one third of the inflows went to funds designed to benefit from the shift to a low-carbon economy. These include the iShares Global Clean Energy ETF, which returned 120 percent during the year. 

‘The disruptive volatility experienced in the oil markets led many to seek alternatives and to re-evaluate the associated risk and return of alternative energy sources,’ says Kenneth Lamont, a senior analyst at Morningstar focused on passive strategies, in a statement.

‘The favorable US election result and other pro-environmental political developments globally were also supportive.’

Investors also heavily backed connectivity funds, which focus on issues such as cyber-security, 5G and cloud computing, as they looked for ways to benefit from the shift to remote working brought about by Covid-19. 

IR teams that want to keep track of theme-based ETFs in their sector are faced with an increasingly broad array of funds. According to the Morningstar report, last year witnessed a record 17 new thematic ETF launches in Europe. 

Of the new funds, connectivity proved the most popular choice with four new launches. Next came energy transition and health technology, with three launches each. Last year also saw two new medical cannabis ETFs and a fund focused on digital learning.

Recent years have seen major growth in the global ETF market. In Europe, assets held by all ETFs rose by 11 percent during 2020 to hit €1.05 tn, says Morningstar, although that remains significantly behind the more than $5 tn managed by US-based ETFs.

Writing on last November, Evan Schnidman, founder of EAS Innovation Consulting, said it’s becoming increasingly difficult to understand how passive investment strategies are affecting share prices.

‘Modern ETFs are predicated on a diverse set of strategies that often make little sense for one individual component of the index, but function effectively as a diversification vehicle,’ he wrote. 

Schnidman added, however, that passive products are ‘often transparent about the criteria for a company to be included, offering IROs the opportunity to target specific indexes.’