Europe still proves tougher nut to crack than US ETF providers anticipate

Tom Eckett

Matterhorn covered in snow

US ETF providers are still struggling to capture game-changing assets this side of the Atlantic as investors continue to favour the brands that are cemented in the region.

The big four continue to have a stranglehold in each of the region they are from; Xtrackers in Germany, Lyxor in France, UBS in Switzerland and iShares in the UK from when it was run by Barclays up until 2009.

From strong positions in their respective regions, these four players have been able infiltrate the rest of Europe, building up brand recognition and product range even before their US rivals had realised the opportunity here.

iShares, now under BlackRock ownership, dominates the region, controlling 46% of the market with €339bn assets under management (AUM) as at the end of Q1, according to data from Morningstar.

In second spot is Xtrackers with €83bn while Lyxor’s purchase of Commerzbank’s ETF range last July has increased its AUM to €73bn. UBS, which saw the second highest inflows in Q1 with €8.5bn, has €51bn assets under its control.

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By contrast, US ETF providers such as First Trust have failed to make a splash. Despite being the sixth largest ETF provider in the US with $72bn AUM, it has only collected €622m assets since entering the European market in 2011. The lack of assets compared to its US cousin can partially be explained by the firm’s range which offers many active ETFs, a vehicle that is yet to take off in Europe.

Fidelity is another player which has struggled to gain a foothold in the region. The US giant currently has just €841m AUM across a small range focused on smart beta products. This is in stark contrast to its US offering which has $14bn AUM.

Meanwhile, JP Morgan Asset Management and Franklin Templeton both have ranges under €1bn assets having only just launched in the past two years while BMO GAM, admittedly part of a Canadian bank, has €558m AUM.

Vanguard remains sleeping giant of the European ETF industry having only launched 26 products since entering the market. Despite this, the firm has €35bn assets making it one to watch if it starts making a bigger push.

Fragmentation issues remain the key issue for ETF providers trying to break into Europe. Different currencies, languages, clearing and settlement systems, more off-exchange trading means each market has its own unique challenges from a distribution perspective.

Furthermore, the distribution of financial products in Europe also tends to be more mediated by banks and insurance companies, and less by advisers.

By contrast, in the US, all trading occurs under a single federal legal system, in the same language and currency, with the same clearing system.

Therefore, the players who have been around since the turn of the millennia are embedded in the market so disrupting this is a tricky task.

One method of disruption, which has showed signs of success in recent years, is through M&A. Invesco’s acquisition of Source in 2017 saw it catapulted into sixth largest European provider with nearly €30bn AUM if you include the ETFs it runs with PIMCO.

WisdomTree also did this by purchasing ETF Securities for $611m in late 2017. This significantly boosted the firm’s AUM to €17bn, but it still has some way to go before catching the major players.

However, a dearth of M&A opportunities remain and given the growth trajectory of ETFs, it is unlikely many asset managers will want to sell-up too easily.

Time is on their side though. ETF assets are yet to hit €1trn in Europe so there will be many new assets looking to find a home in the coming years meaning plenty of opportunities to make a serious impact.

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