Anyone investing in 2022 would have been faced with one of the worst market landscapes in decades, as stocks and bonds suffered double-digit falls amid high inflation, rising interest rates, energy shocks and geopolitical conflict.
As markets entered this new regime, adoption of ETFs across equities and fixed income continued to grow with investors using these instruments for diversification, liquidity and managing risk in their portfolios amid higher market volatility.
There are various drivers behind this accelerating trend. Although rising inflation has hit cash deposits, the savings many households accumulated during the pandemic are still at relatively healthy levels. For example, today, an estimated £265bn deposits are made into bank accounts that pay no interest in the UK. Instead of letting inflation eat away at their savings, many people have made the decision to make their cash work harder. Enter: ETFs.
ETF savings plans are paving the way across Europe
Across Europe, ETF savings plans are bringing new people to investments. 12 countries in Europe now have ETF savings plans. While Germany leads the way, accounting for 94% of the market, other countries are catching up. German and Dutch ETF savings plan distributors have expanded across Europe and in some markets, such as Spain, local banks are now offering similar savings plans as they seek to convert traditional savers into investors.
In Europe, take up of ETF savings plans provided by our iShares division grew by 22% in 2022 alone, representing contributions by more than three million people . We anticipate that across the continent, 10 million new investors will hold iShares ETFs over the next five years .
Cost and increasing ease of access also plays an important role. One of the biggest drivers for the growth of ETFs has been commission free trading platforms – some 40 million new self-directed investment accounts were opened globally since 2020 , empowering first time investors via simple, low-cost digital platforms.
Choice in the market
Many people coming to investing for the first time tend to gravitate towards to broad, globally diversified equity products, such as the MSCI World index. However, the new year has also seen European investors reflecting on how 2022’s market turmoil may be the catalyst for many of 2023’s opportunities.
One asset class that cannot be ignored is bonds thanks to their renewed income-generating potential amid rising interest rates. The variety and liquidity of bond ETFs make it easier to build income-seeking portfolios.
This demand is reflected in how European ETF investors have upped their fixed income allocations this year. Currently some 61% of the fixed income credit market is yielding above 4%, which is higher than the average 3.4% interest paid by savings accounts. Investors have particularly flocked to investment grade credit, which now provides attractively high yields despite remaining low risk, and, thanks to ETFs, is an affordable option.
Index adoption is accelerating in the UK
Traditional wealth managers and banks still control the largest market share in fund distribution in the UK, but the market has evolved quicker than most in its adoption of digital platforms. It’s specialism in retail investment platforms has been enhanced by the rapid growth of ‘Neo-brokers’ over the past few years – a trend we expect to triple in 2023 compared to 2021 levels – and which has contributed to an acceleration in the use of index-based solutions.
UK investors have been won over by non-traditional fund distribution channels which are innovating in areas such as technology, democratising the advice model, improving fee disclosures, and lowering investment thresholds.
Asset allocation options have also increased. Sophisticated multi asset portfolios were once traditionally only available to professional investors. While this new cohort of investors are relative novices, digital platforms enable them to access ‘off the shelf’ institutional level asset allocation in a wrapped solution.
The size and breadth of ETF and index products in the UK also mean these investors can express increasingly granular investment decisions. Execution only platforms offer easy access to nearly all types of investments, such as thematics, often using ETF wrappers.
This watershed moment for ETFs and index products speaks to a direction of travel that is unlikely to reverse, and one that will require a recalibration of how we think about financial wellbeing. The traditional savings accounts with lack lustre returns may ultimately give way to better yielding alternatives.
Salim Ramji, global head of iShares and index investments at BlackRock. The views expressed above should not be taken as investment advice.