US asset manager Pacer ETFs could struggle to get a foothold in the European ETF market should they fail to replicate their strong US adviser distribution methods on the continent.
The $35bn issuer announced it is planning to launch UCITS equivalents of its flagship Cash Cows ETF range as soon as February, having reached “sufficient scale” in the US.
However, Pacer ETFs president Sean O’Hara told ETF Stream the group was yet to fully establish its marketing and distribution plans for the “disjointed” $1.8trn European ETF market, despite potentially hitting the market next month.
Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said: “Pacer ETFs have a similar distribution strategy to First Trust and have been able to leverage their strong adviser distribution efforts in the US to gain scale.
“This might be harder to replicate in Europe. First Trust has also struggled since it entered the European market.”
First Trust – which houses $133bn assets under management (AUM) in the US – entered the European market with three smart beta ETFs in 2013.
Over a decade later, it has $1.9bn AUM across 26 ETFs, according to data from ETFbook, as the group’s comparatively high fees have turned investors off.
Deborah Fuhr, managing partner and founder at ETFGI, agreed a strong distribution strategy was needed if Pacer ETFs were to be successful in Europe.
“Without a strong distribution strategy, new products will struggle,” she said. “You could have the right product but if you come in at the wrong price, nobody is going to buy it.
“They have to get their product and marketing mix aligned to what is expected in Europe and make sure they are available in the right markets, with the right market makers and the right listing venues.”
O’Hara said the group will “think carefully” about its distribution strategy in Europe, but did not commit to “boots on the ground” or working with a third-party distributer.
Despite this, he added he was confident there would be demand for the Cash Cows ETF range among European investors due to the “unique” nature of the strategy.
The global UCITS gateway
One area where Pacer ETFs may have some immediate success is the offshore market in the US.
O’Hara has made no secret of the group’s plans to leverage the UCITS wrapper abroad, noting the “vibrant market” of non-resident citizens who have relationships with financial advisers in the US.
Andrew Craswell, European head of ETF services at Brown Brothers Harriman, believes the group could quickly build up scale in its UCITS products by distributing to these markets
“It is another US manager that has already built scale so it makes sense for them to look further afield to broaden their distribution to include UCITS in their lineup,” he said.
“There is quite a big market for offshore funds in the US. Non-resident citizens that live in the US – normally via broker dealers in Miami – are eligible investors for UCITS products, giving Pacer ETFs an opportunity to build some scale quickly.”
By investing in UCITS ETFs via offshore broker dealers in the US, non-resident citizens can benefit from lower withholding taxes compared to ’40 Act’ ETFs, no estate or inheritance taxes and accumulating share classes.
Fuhr added: “It is not surprising it is targeting this market, especially as Pacer ETFs has grown its assets in the US significantly.
“As the ETF business matures and end up having clients in other jurisdictions, looking at a solution like this makes sense. The most likely scenario is you go to Europe first.”