The passive investment industry – dominated by BlackRock, State Street and Vanguard – is set to grow in Europe, possibly mirroring the growth path in the US where it has spread far more widely and deeply, spurred on by some help from Mifid II.
Assets held in US-listed exchange-traded funds (ETFs) stood at $3.5 tn at the end of November 2017, compared with $790 bn across all Europe-listed ETFs, according to London-based research firm ETFGI.
‘ETFs are growing in Europe and will continue to grow. They had their highest growth rate ever last year with $106 bn of net new money going into ETFs in Europe,’ Deborah Fuhr, managing partner and co-founder at ETFGI, tells IR Magazine. ‘This picture can grow a lot further. Right now, ETF assets in Europe constitute just 4 percent of all mutual fund assets – so it is very small in Europe, and clearly has large potential to grow quite significantly from where it stands today.’
A lack of data has deprived investors of an accurate picture of the pricing and liquidity of ETFs in Europe, deterring many from using them. Now, however, for the first time, pre and post-trade disclosures of the details of orders submitted to and transactions conducted on trading venues across Europe will be published due to Mifid II.
‘Under Mifid II, ETFs become Mifid instruments and require post-trade reporting – and increased trading transparency will be beneficial,’ Simon Barriball, managing director and head of ETP trading in Europe for ITG, tells IR Magazine. ‘But there is not a lot of data yet to make informed decisions. The clarity isn’t currently there.
‘You will need a three to six-month dataset to get a real picture. The execution landscape is changing a lot and this year will be a learning curve. It will take some time to [decipher] where the liquidity is and how things are changing, and to understand more about execution costs.’
Does that mean Mifid II and trade disclosures will put ETFs on a growth path? ‘There is some difficulty in determining how much the growth of ETFs will be down to changes in Mifid II or down to ongoing rotations into passive structures,’ says Barriball. ‘ETFs have been beneficiaries of the rotation out of active management into passive management. What is at play here is a move away from high cost to low cost. I think you would see less active to passive movement if there were more active structures that could compete on the same price level. The active performance doesn’t justify the fee.’
In this way leading ETF players in Europe – BlackRock, Deutsche Bank, Lyxor and Amundi – are all fighting a war on fees that has helped them take money away from active managers.
‘There is a move into index products because, over time, the index is likely to outperform many managers – many of which charge higher fees – and lower-cost products deliver better returns for you in the end,’ comments Fuhr. ‘I think we will break through $1 tn [in European ETFs] before the end of 2018.’