European investors are piling into exchange-traded funds, favoring those that mimic active fund managers, in a market where traditional trading relationships between assets are breaking down.
Investment in ETFs, securities which track an index or basket of assets, rose to more than half a trillion euros at the end of last year, a record. A combination of low costs and flexibility kept investors hooked even though this break-down of so-called correlations should favor actively managed mutual funds.
For fund managers, who have had to deal with risk-on, risk-off central bank-dominated markets since 2009, a return to fundamentals since mid-2016 as stocks increasingly move independently of each other is a welcome departure.
However, rather than a rush of money into mutual funds, flows into ETFs have held firm, Thomson Reuters Lipper data shows.
High fees coupled with persistent underperformance at traditional funds and a nimbler set of low-cost ETF offerings that slice and dice markets to mirror some of the traits of "active" fund management, are among the main reasons that cost-conscious asset-allocators remain hooked, market participants say.
Some of last year's most popular European ETFs included those that target stocks trading at below-average valuations, some that pick stocks with minimal intra-day price swings and others that offer currency hedges and can protect investors from seeing stock gains wiped out by currency volatility.
Since most of these decisions are made automatically by algorithms, index providers and ETFs can offer these features to investors at much lower costs than the traditional fund management industry.
A typical European equity ETF's fee margins are half those of traditional fund management groups at around 29 basis points, according to Goldman Sachs analysis.
"We try and create a diversified portfolio but spread our risk right across the globe and right across different asset classes. And the most cost-effective way of doing that is through index funds," Justin Onuekwusi, multi-asset fund manager at Legal & General Investment Management, said.
So far this year investors have pumped about $35 billion into global equities according to latest data from Bank of America Merrill Lynch. However, that is largely due to more than $50 billion via ETFs while traditional funds have seen $17.5 billion pulled out.