Lorraine Sereyjol-Garros, Head of ETF and Index Development at BNP Paribas Asset Management, talks about the latest trends in the multi-trillion-dollar global ETF market.
What have been the big trends recently in ETFs?
First, let’s remind readers that 2024 was another record year for inflows. Flows into UCITS ETFs mainly went to equity funds, particularly US equities, whose share of inflows rose from 20% in 2020 to 50% in 2024.
We saw a decline in the share of investments in environmental, social and governance (ESG) ETFs. The share of flows into Sustainable Finance Disclosure Regulation (SFDR) Article 8 and 9 funds fell from 30% in 2023 to 17% in 2024, with ESG ETFs representing almost 25% of assets under management.
We are seeing reallocations from these products to those with the smallest performance gaps with the traditional major indices. Some ESG indices can be very selective, with strong biases that can penalise their performance and that are therefore of less interest to investors.
However, there was better resilience of inflows into ESG bond ETFs than into those based on equities because the latter have a low tracking error compared to traditional indices. Since the beginning of 2025, nearly half of the flows into bond ETFs have been in ESG products, while in equities, the share is around 15%.
Finally, active ETFs saw large inflows in 2024, particularly in the equity segment with €13 billion. Flows into active ETFs represented 7% of the total flows – while they represent only 3% of assets under management.
What are institutional investors looking for when selecting ETFs?
Institutional investors in ETFs are mainly interested in the selected benchmark. They carry out due diligence on the management company, particularly its risk management and its ability to replicate the index with the lowest tracking error.
These investors want to know the jurisdiction of the investment vehicle and the costs. They consider the tracking difference, i.e. the outperformance or underperformance compared to the replicated index.
Some methodologies make it possible to deliver a slight outperformance, particularly in the context of synthetic replication approaches. This is the case, for example, with synthetic strategies on the broad US S&P 500 index, which can beat index performance with dividends reinvested.
The liquidity of the ETF and the spread between buy and sell prices can be a concern. The smaller the spread is, the closer the transaction price will be to the estimated net asset value, which is an advantage for investors.
Institutional clients also like to have a sense of the investor base. It is not of course possible to have full visibility because ETFs are traded on the stock exchange, but a broad investor base is often important.
How do institutional investors who often own large bond portfolios use bond ETFs?
Traditionally, insurers manage their bond portfolios line-by-line, especially as they are subject to specific accounting at historical cost, whereas ETFs and open-ended funds are valued at market prices.
But they also need portfolio diversification beyond sovereign debt denominated in euros. In asset classes that are more peripheral in their allocation, such as high-yield corporate debt or emerging debt, they have become accustomed to gaining exposure via ETFs.
These products have held up well during market crises – the Covid pandemic, for example – and offer good liquidity whatever the circumstances thanks to a broad investor base. This extensive ownership, along with the fact that ETFs provide an instant market price for a bond portfolio, has convinced many investors to make more use of them, regardless of the underlying bonds.
In Europe, major institutional investors such as insurers, central banks and pension funds have increased their investments in bond ETFs. It should also be remembered that many bond ETFs have attractive fee structures and adhere to ESG criteria.
Institutional investors like ETFs because bond indices are made up of a large number of securities and are therefore highly diversified, whereas active funds are often more concentrated.
Doesn’t the use of the same indices by ETF providers lead to a concentration risk?
On bonds, the main indices – those of Bloomberg (formerly Barclays) and JPMorgan – are very diversified. They are also used as a benchmark by active managers, not only by index managers.
On the equity side, in the S&P 500 the ‘Magnificent 7’ stocks have become more dominant. The outperformance of the Mag-7 explains the S&P 500’s strong run in 2024. Active managers have often had to invest in these stocks to be sure of matching the benchmark’s performance.
The investment policy of institutional investors is typically benchmarked against major indices. This encourages them to look for products with risk/return profiles close to these indices. As there are more than 2,100 ETFs on the UCITS market, ETF providers can offer many alternatives to traditional indices for investors who would like to consider less concentrated exposures to markets.
Will assets under management in ESG and climate ETFs continue to fall?
Not in Europe, where ESG and climate issues are still at the heart of many institutional clients’ approaches.
The relevant indices have evolved in recent years to meet the needs of clients and diversify investment opportunities. For example, we have ESG index-based ETFs with a minimal performance gap compared to traditional indices. Investors are welcoming these products.
Last year, we launched active ESG Article 8 and 9 SFDR funds replicating the market beta by applying our own ESG methodology. Active management allows us, for example, to adapt quickly to regulatory or label changes, or to new controversies.
What are the latest innovations in ETFs?
Our credo has always been to innovate, particularly in terms of ESG. For example, we were the first to launch a low-carbon fund in 2008.
On the market, mature ETFs have worked well. They meet genuine demand from clients because they differ from active funds by being investable at any time.
We expect a wave of active ETF launches in 2025. Institutional investors have recently been looking for ETFs that replicate the market, but with incremental performance (alpha) that covers the management fees.
There is also interest in equal-weighted ETFs and in specific themes such as infrastructure or hydrogen. In this context, we expect renewed investor interest in thematic funds as the importance of diversification comes back into play.
