Industry Updates

European ETF market to compete with US by 2025

George Geddes


Following Lyxor Dauphine Research Academy's recent


explaining how more active managers will adopt passive investments, Moody's Investor Service has announced its expectations for Europe's ETF market.

Lyxor Dauphine concluded its report by saying investors will soon stop thinking "active or passive" but rather "active and passive". Moody's latest report supports this theory, predicting passive funds will comprise 25 per cent of the fund industry's total AUM within Europe by 2025. ETFs are a key driver in this development, growing in demand by both institutional and retail investors. This could result in the European market - where ETFs comprise 6.2 per cent of fund AUM - finally competing with the US where ETFs comprise 18 per cent of its fund industry's AUM at years end 2017.

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The major selling points of an ETF is its flexibility, liquidity and low cost, which institutional investors are gradually starting to take full advantage of to hedge and diversify their portfolios. Retail investors only account for 15 per cent of ETF's AUM which isn't surprising given their smaller budgets and they usually hand over responsibility of their investments to financial advisors. It is likely more capital will flow into ETFs after the banning of financial advisors receiving commission from funds, earlier this year. Commission being a dominant factor why advisors would choose an active fund over an ETF. Additionally robo-advisors have increased retail investors' accessibility to ETFs as more platforms come to the market.

Equity ETFs account for nearly three-quarters of the European ETF market but this value is expected to reduce as fixed income and thematic ETFs grow in popularity. Thematic ETFs that include Socially Responsible Investment (SRI) and Environmental, Social and Governance (ESG) factors have seen a massive spike, with nearly every major issuer offering a selection.

As more investors inevitably succumb to the passive market, the European ETF industry will become very top heavy in terms of ETF issuers, according to Moody's report. The top five ETF issuers* account for 79 per cent of Europe's AUM which would likely grow in the future, making it harder for other firms to enter the market and compete.


There isn't a dominant figure within the more niche markets that offer specialised ETFs or smart beta products. This provides an opportunity for active asset managers to transition successfully to the passive market.

*BlackRock, DwS, Lyxor, UBS and Amundi


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