Upcoming financial market regulation MiFID II, which takes effect in January, will further boost sales of passive funds such as ETFs at the expense of actively managed funds, according to global research and consulting firm Cerulli Associates.

Angelos Gousios, director, European retail research, at Cerulli.

“We believe that MiFID II’s drive for transparency on costs will shift the balance further in favour of passive investing,” said Angelos Gousios, director, European retail research, at Cerulli.

In the latest issue of The Cerulli Edge – European Monthly Product Trends, the firm notes that 2017 is ending on a high with a sustained bull run across major equity markets. This has however led to concerns about valuations in developed markets, particularly in the US, where the S&P 500‘s bull run is approaching its ninth year.

Cerulli expects that investors sticking with developed markets in 2018 will increasingly opt for passives, either plain vanilla tracking the likes of the S&P 500, or smart beta variations.

Although Cerulli notes that the MSCI Emerging Markets Index is also in record valuation territory, company earnings estimates are still rising markedly, indicating equities there may provide the best relative value.

“Many pundits are forecasting a pullback for developed markets in 2018,” Gousios said. “If at long last the doomsayers’ warnings are correct, emerging markets could prove the best bet among equities.”

As with developed markets, Gousios expects passives to be increasingly in vogue within the emerging markets space. He said: “With data suggesting that emerging markets funds are no more likely to beat their benchmark than others, there may be easier money in passives, including ETFs.”

The firm also expects demand for funds that meet various environmental, social, and governance criteria to swell early next year.