ETF inflows hit record highs as investors embrace global equities and active strategies

Talking Heads with Daniel Dornel

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing the latest ETF (exchange-traded fund) fund flows. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Daniel Dornel, Head of ETF Research. Welcome, Daniel, and thanks for joining me.

Daniel Dornel: Thank you, Daniel. I’m very happy to be here.

DM: As always, Daniel, it’s been an eventful quarter. One of the key surprises has been the resilience of equity markets. When you’ve seen the big increase in yields for government bonds, typically a rise in interest rates goes with the decline in equity markets but, so far, they seem to have shrugged that off. In terms of ETF flows, what are the dynamics you’ve seen in the third quarter?

DD: It has been a remarkable period. Q3 was the strongest quarter ever, with inflows around €125 billion. What’s really impressive is that we are seeing a pattern of breaking records one quarter after another. If we look closer at the monthly breakdown, July and August were the two largest months ever recorded in the UC[ITS] ETF landscape, with July alone bringing in over €50 billion.

This momentum is carrying us into an historic year. Year to date, we have already seen almost €350 billion inflows into UC[ITS] ETF[s], which means we have already surpassed the total full-year figure from last year, €327 billion.

While the growth is broad, equity projects dominated the landscape this quarter, capturing almost €100 billion of those €125 billion of total inflows.

DM: It’s interesting that you say that because there’s been a long discussion about cash on the sidelines and whether or not investors are willing to put that cash to work. And it seems from the figures you cite for ETF flows, maybe they are. We also see the strong performance of equity markets being followed by flows into ETFs. Clearly that’s a strong support for the market. Are there any particular categories or products that stand out?

DD: Without doubt, global equities have been standing out. In Q3, they attracted just under €55 billion. This isn’t a sudden spike; it is a sustained trend we have been seeing from last year.

Just to give a few figures, the year-to-date figure for global equities is already €145 billion compared to just under €100 billion for last year. So global equities now represent about a third of all equity flows.

What is particularly interesting is the acceleration in all-country exposures – a blend between developed and emerging market equities. Historically, they have been behind developed-only global equities. But on this particular sub-category, we have seen a jump from €40 billion last year to €83 billion on a year-to-date basis. This suggests investors are looking for the more diversified product[s] they can find these days.

DM: I would imagine these inflows into global ETFs, including emerging markets, probably has something to do with the strong performance we’ve seen, particularly in Taiwan and [South] Korea, around semiconductors and tech hardware. I think investors are looking to try to tap into that dynamic. Speaking of dynamics, is there anything else that you see across equity markets?

DD: Let’s start with the US. After a very strong acceleration in Q2, the appetite for US equity remained, with €23 billion in flows in Q3, again mostly concentrated in core exposures.

Moving on to Europe, we saw an interesting rebound in Q3, with €9 billion inflows. This suggests a return in confidence from investors after a very difficult Q2 where we had around €5 billion [of] outflows. We also saw an acceleration in emerging markets, bringing in €6.8 billion, a recovery from a quiet second quarter on emerging markets.

However, it hasn’t been positive everywhere. China continues to be a challenge, and we saw another difficult quarter with €1.5 billion outflows from Chinese equity product.

Looking at sub-asset classes, sector and thematic ETF[s] brought in €15 billion, the lion’s share driven by IT and tech-related themes. But there were two interesting additional trends, with healthcare – we saw €1.5 billion inflows there – and Eurozone banks, with €1.3 billion inflows.

DM: That is encouraging that you’re starting to see inflows again into Europe. We’re seeing that all the investment that the region is putting towards strategic autonomy, defence and so on is starting to bear some fruit. It’s also interesting that, despite the inflows into emerging markets, you still see outflows from Chinese ETFs. And we appreciate that tech is a big driver for the interest in emerging markets.

I started out saying we’ve had [a] surprisingly strong performance for equity markets despite the big increase in [bond] yields. I’m curious if that increase in government bond yields has had an impact on flows for fixed-income ETFs?

DD: Fixed income had a very strong quarter as well, bringing in €27 billion. The primary engine was government bonds, with €10 billion inflows. It was a mix of all maturity exposures, especially on global and euro bonds, as well as short-term maturities, especially on US, but also on European exposures.

We also saw a significant interest in ultra-short instruments, which brought €8 billion. Roughly half of that was on overnight euro exposures and 25% in US Treasuries with a maturity from zero to one year on corporate investment grade.

We also see some flows there with €4 billion, a split between US all-maturity product and euro short term. The only area of weakness was a yield with a significant slowdown, only €500 million inflows over the quarter, primarily because of the September figures where we had very negative flows on euro high yield.

DM: The outflows for high yield are relevant, as I’ve heard from our portfolio managers. That was one of the key drivers behind the increase in yields and spreads that you saw for high yield, particularly in September. Last word on ETF flows for the quarter?

DD: I’d like to highlight the rise of active ETFs again. This is where things are moving quite rapidly. In Q3 alone we saw €11 billion of inflows. This brings us on a year-to-date basis to €34 billion, so roughly 10% of the flows and it’s already ahead of [the] 2025 figure, which was just under 30 billion.

So, the dynamic is very impressive, especially on enhanced strategies and equity income strategies. But it’s not just about the flows, it’s also about the product innovation. If you look at all the ETFs launched in Europe year-to-date, 40% were active ETF[s] – that’s already over 100 new funds this year.

DM: If I can summarise some of the key points, you said not only was the third quarter the strongest ever in terms of ETF flows, but recently almost every quarter is the strongest, so it really does seem there’s a lot of momentum behind ETFs.

You highlighted that flows are going more towards global equities, conceivably as investors are looking to tap into the tech dynamic in emerging markets. That said, you also saw a rebound of flows into Europe, so another renewed bout of optimism.

And finally, positive inflows into fixed income despite the increase in [bond] yields. But you highlighted that this is tend[ing] to be short duration, so investors less at risk of rising yields and able to pick up some income in the meantime.

Daniel, thank you very much for joining me.

DD: Thank you, Daniel. Always a pleasure.

DM: That’s it for this week’s episode of Talking Heads. If you would like more information about our capabilities in ETFs, please reach out to your asset management contact or check out Viewpoint, our website for investment insights, at Viewpoint.bnpparibas-am.com. Viewpoint brings commentary and analysis in a variety of formats, from investment outlooks to asset allocation videos and podcasts to help investors make better-informed decisions.

You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Daniel Dornel, Head of ETF Research.

Please do join me next week. Until then, take care.