The game-changing opportunity for European ETFs

by , 28th February 2018

Traditional mutual fund managers need to get on the front foot when it comes to engaging with – and ultimately entering – the ETF marketplace, amid the inexorable rise of ETFs in the European region.

With the majority of new money flows in Europe going into ETFs compared to mutual funds and some of the latest advice propositions going ETF-only to keep overall costs down, the benefits of ETFs continue to be recognised by both the asset management community and a growing number of end investors.

This growth is often seen as a threat to asset managers, but now is actually the time for forward-thinking businesses to turn it into an opportunity instead. Traditional fund managers can reap the rewards from the growth of ETFs by launching versions of their top funds, effectively creating alternative distribution mechanisms for existing core strategies and flagship products.

There are fewer and fewer strategies that cannot be replicated in today’s market, but creating your own ETF should not be considered as a defensive move.

With the largest generational wealth shift in history now underway, ETFs represent a game-changing opportunity, allowing asset managers to distribute products more broadly and access new investor types, particularly millennials and cost-sensitive investors. The next generation of investors don’t shop like their parents did, they don’t consume media like their parents did, and they won’t invest like their parents did, so asset managers need to find innovative ways to attract assets from the next wave of investors or risk being dis-intermediated by faster-moving competitors.

Increasing numbers of asset managers are already cottoning on to this, launching and expanding their ETF offerings, and HANetf anticipates the acceleration of this trend as the wider ETF market continues to grow.

Even for those groups still unsure about whether to move into the ETF space, at the very least they need to have a strategy with regards to the ETF market. Burying one’s head in the sand is simply not a sensible long-term plan. Indeed, over the next few years we expect asset managers both large and small to have determined how they plan to embrace the ETF market for the long-term.

However, when it comes to launching ETFs, the actual strategies implemented by firms needs to be carefully considered. While it could be tempting to chase success and launch a ‘me too’ ETF solution, the broad index plays – such as vanilla US equities for example – are already extremely competitive on price.

Many traditional asset managers have long held the belief that the perceived barriers to entry and high costs are prohibitive to them entering the ETF market. However, with the realisation that ETFs are not synonymous with passive strategies, many now see that the ETF wrapper is simply better ‘future tech’ than a mutual fund and they need that wrapper in their offering. With the entrance of HANetf that provides all the ‘picks and shovels’ it’s leading people to see that the barriers to entry are no longer insurmountable.

Rather than fighting on existing battlefields, it makes more sense for asset managers to deliver their own unique IP  –  whether in equities, fixed income, ESG, thematic or active strategies – in a way that is aligned with the needs and desires of tomorrow’s investors. By developing their own ETF range, asset managers can effectively protect their business’ and guard against the threat of competitors developing low-cost versions of popular strategies.