The European ETF industry is gaining significant momentum and there seems to be an increasing number of established asset managers seeking their way into the ETF space. Read our interview with Hector McNeil, Co-CEO, HANetf on various trends shaping the European ETF landscape.
- What factors are driving asset managers to launch ETFs in Europe?
There are many strong arguments for asset managers to create a European ETF strategy. Regulatory focus on fees, transparency and investor value in MIFID II, RDR and other regulatory initiatives may have forced many traditional mutual fund issuers to rethink their product line-ups and strategies. ETFs are a distribution solution that can work for active, systematic and indexed asset managers to meet the expectations of modern investors and extend their reach to new investor types. ETFs are not a distribution panacea, but they do align closely with the needs and expectations of modern investors who want transparency, liquidity and diversification at a reasonable cost. As ETF-only distribution opportunities such as ETF model portfolios, ROBO advisors and D2C platforms grow, asset managers have an opportunity to reach a more diverse client and previously inaccessible European investor base by creating an ETF offering. Moreover, as we live in a world that demands immediacy and responsiveness, the demand for ETFs will only increase as millennial investors come online – products like ETFs which trade intra-day with low entry costs and high liquidity fit neatly into the expectations of the new social landscape. All of these factors combine to encourage asset managers to develop an ETF strategy in Europe.
- What are the benefits of using a ‘white label’ ETF platform?
An increasing number of asset managers recognise that ETFs represent a powerful distribution technology for their investment IP. With European ETF growth exceeding that of the US for the first time in 2017,1 Europe has become the go-to market for aspirational issuers. The question in many boardrooms changed from “Should we launch ETFs?” to “How do we launch ETFs?” When asset managers want to issue ETFs they have three options: they can create their own business from the ground up, but only if they are prepared to spend significant amount of time and money. Given time and cost commitments, this route is only open to the largest companies and, importantly, does not guarantee any success. Secondly, a company may decide to buy their way into the ETF market. This approach is becoming ever harder in Europe as the majority of attractive takeover targets are already off the shelf, or only available at a prohibitive price. The third route is to use a white-label ETF provider, like HANetf. With all of the operational, regulatory and distribution infrastructure available ‘off the shelf’, an asset manager can significantly reduce their cost and time to bring an ETF to market – potentially in under 100 days. Lowering the barriers to entry to European ETFs is a game changer for smaller and mid-sized asset managers who lack the resources to develop their own ETF business but can’t afford to miss the long-term opportunity.
- What are the challenges facing active managers In Europe?
While less than 5% of the overall UCITS market, UCITS ETFs punched significantly above their weight in 2017, gaining over €64 Billion of the overall €738 Billion of the yearly flows2. Given this rapid expansion, creating an ETF strategy is among the highest priorities for many asset managers, both active and indexed – 67% of respondents to the EY Global ETF Survey expected a majority of asset managers to have an ETF offering in the near future. Asset managers are recognising the business opportunity of participating in an industry that saw growth of over 40% in 2017 and are seeking to develop an ETF range which they can offer alongside other structures like mutual funds, structured products, separately managed accounts or investment trusts, providing an alternative channel through which their investment ideas can be bought. The tremendous growth of ETFs, and the variety of new ideas coming to market demonstrates that advisers, model portfolio managers and end investors want a wide variety of tools, both active and passive, to help them meet their investment objectives, and they want them in an ETF format.
Just as a coffee company can sell their product as beans, ground coffee, pods, instant powder or pre-mixed iced coffee, so an asset manager can add to their distribution firepower by adding an ETF category to their product range. Many will already offer multiple wrappers including mutual funds, hedge funds, structured products, and so on. Adding ETFs is simply extending this footprint and giving investors the option to gain exposure to the same active investment strategies they already own via an ETF wrapper has the potential to offer significant improvements to their current experience.
- What does the future holds for the ETF industry – any upcoming trends, opportunities?
In Europe, we are just scratching the surface – there is massive scope for further expansion of ETFs, particularly in thematic, ESG, fixed income and active strategies. With the investor demand for lower cost, higher liquidity products, it’s not unreasonable to expect that in the next 10-15 years most new fund launches will either be ETFs, or look a lot like them. Finally, with the advent of white-label ETF providers, like HANetf, the barriers to market entry are lowering significantly. This will catalyse the entry of many more asset managers to Europe who want to benefit from this high growth, innovative and exciting market. We believe that every asset manager needs an ETF strategy – now.
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