Europe’s ‘rapid’ ETF growth rate set to continue, says State Street

George Geddes

a small green sprout in a dirt patch

Regulation, investor demand and technology advances are just a few reasons why ETFs are poised to remain a positive and disruptive force across Europe, according to State Street’s latest report.

Titled European Outlook for ETFs, the report highlights Europe’s ETF industry has an annual growth rate of 18% ever since the financial crisis. With only $143bn across 650 ETFs in 2008, the market has grown to $850bn across more than 1,700 ETFs in June 2019.

State Street expects this rapid growth to continue as investors seek cost-effective and transparent investment options, enabled by the introduction of MiFID II which was implemented in January 2018.

MiFID II legislation included the removal of retrocession payments to distributors in favour of a more transparent, fee-based structure to ensure advisors are working with their clients’ best interests.

Since the regulation was introduced, ETFs have seen net inflows of nearly $100bn while mutual funds have suffered outflows in excess of $300bn, according to State Street.

Using the more developed US market as a benchmark, MiFID II also addresses a concern for lack of visibility in trading volumes and transactions. The US market’s use of a single consolidated tape enables its investors to access real-time trading and quota data from multiple venues whereas Europe offers a fragmented stock market.

Gap between European and US ETF markets remain prominent 

While this progression has been slow, Brexit has added further delays due to uncertainty, however, it hasn’t hindered the regulation's bid to improve transparency and improve the adoption of ETFs.

New and innovative products have also aided the wider adoption of ETFs in Europe such as thematic and multi-factor themes. Issuers and index providers have had to work more closely to utilise their expertise within specific areas and sectors. Some other trends which are starting to emerge within the ETF market include cryptocurrency, blockchain and non-transparent ETFs.

Two differences between the US ETF markets and Europe’s market is who are using the investment vehicle. Institutional investors are the most common users of ETFs in Europe whereas the US is dominated by retail investors and investment advisors.

While Europe’s ETF market has grown significantly over the last 11 years, ETFs still only represent 10% of the overall fund assets in the region which is why State Street believes there is plenty more potential for further growth.

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