Thematic and socially responsible investment strategies are expected to play a significant role in the future growth of passive investing in Europe, according to financial research firm Cerulli Associates.

Fabrizio Zumbo, Associate Director, European Asset Management Research, Cerulli.

In a recent report, European Passive Investments 2021: Achieving Success in a Growing Segment, Cerulli interviewed ETF issuers, index providers, and asset managers on their growth expectations for Europe’s passive segment and what factors are likely to fuel that demand.

The report found that more than a quarter (28%) of European asset managers expect the thematic ETF market to grow rapidly over the next two years, while a further 37% anticipate moderate growth.

Products that incorporate environmental, social, and governance (ESG) factors are also expected to experience high demand. More than three-quarters (76%) of index providers anticipate significant demand for funds linked to ESG indices over the next two years.

The bulk of passive ESG products — both index funds and ETFs — are currently geared towards equity exposures; however, 82% of fund providers in Europe expect demand for sustainable fixed income products to grow over the next two years.

In terms of ESG themes, 29% of ETF issuers expect renewable energy to attract the most client interest over the next two years, while a further quarter (26%) anticipate climate change to be the most in-demand strategy over this period.

Fabrizio Zumbo, Associate Director, European Asset Management Research at Cerulli, said: “Around half of the ETF issuers believe that rising interest in thematic investing runs parallel to the urgent need to tackle the serious issues facing the planet. During 2020, European investors put sustainability and social responsibility at the core of their investment approaches. As a result, the ESG product landscape has evolved rapidly with asset managers and ETF issuers developing highly specialized offerings for passive investors.”

The report also noted that Europe’s passive market will continue to be buoyed by many of the factors that have fuelled its growth in recent years including retail investors’ increasing adoption of the ETF wrapper, institutional investors’ continued use of index funds, growing cost-consciousness amongst all investors, and favourable regulation.

Germany is set to experience the highest level of passive ETF growth in Europe with 70% of ETF issuers expecting assets to grow quickly in the country. France is expected to see the second-highest level of passive ETF growth with 68% of ETF issuers anticipating rapid growth in this market.