The future of the European ETF market

Retail adoption to surge across Europe

Detlef Glow

Detlef Glow

The European ETF industry has written a true success story since its inception in the year 2000, however, I expect the European ETF industry to continue to grow at an above-average rate compared to the overall fund industry in Europe.

Future growth will be driven by numerous factors including wider adoption of ETFs by all investor types, product innovations and everything in between.

Below I describe the most important growth factors driving my assumption that assets under management will double to more than €2.5trn before the end of 2030.

Retail investor boom

First of all, I expect wider adoption of ETFs by retail investors from all over Europe, as retail wealth management platforms such as Nutmeg and the so-called neo-brokers such as Scalable Capital or Trade Republic witness a steady growth of customers.

The growth of ETF saving plans from retail investors in Germany via these and other kinds of platforms might be seen as a blueprint for growth for the rest of Europe.

In addition, some ETF promoters such as Vanguard started direct-to-consumer platforms that enables retail investors to buy their ETFs directly from the issuers, a factor that may become another source of growth.

While retail investors will mainly invest in equity ETFs, the growth in the bond segment will mainly be fueled by institutional investors. The current market conditions may hold some investors back from buying bond ETFs but I am pretty sure that this will change once the bond markets have weathered the storm of increasing interest rates and high inflation.

Considering this, the European ETF industry will witness a high number of bond ETF launches to meet the demand from investors. Even as some of these new ETFs will be plain vanilla products, the majority of the newly-launched bond ETFs will cover specific segments of the bond markets such as single rating segments, convertibles or green bonds, in various base currencies.

In addition, we will see more specialised ETF issuers such as Tabula launch highly-sophisticated bond ETFs to cater to institutional investors who want to invest beyond plain vanilla bond strategies.

Especially the more specific bond ETFs covering single rating segments or maturity bands will gain attention from professional investors since these ETFs can be used as proxies for single bonds as they deliver a comparable risk-return profile but without the issuer risk of a single bond.

The continuing trend toward sustainable investing will drive the growth of ESG-related ETFs. Following the wave of mutual fund and ETF reclassifications under the Sustainable Finance Disclosure Regulation (SFDR), index providers and ETF issuers now have clarity on how to structure indices and products to meet the regulatory requirements for Article 8 and 9 products.

This means the ETF issuers are now able to develop products that will meet the expectations of investors. The trend towards ESG-related investment products will stay in place, even as the European Commission may change its approach to classify products under SFDR.

Non-transparent ETFs

The so-called non-transparent or active ETFs might become the main driver for the growth of the European ETF industry once the regulators in Europe approve the launch of such products. If the approval of non-transparent ETFs is accompanied by a Europe-wide ban on inducements for independent financial advisers (IFAs) and platforms, these products will be a game changer for the fund distribution landscape in Europe.

The approval of non-transparent ETFs will enable the promoters of mutual funds to distribute their products via a local exchange direct to investors without negotiating distribution agreements with banks, financial advisers and distribution platforms.

Despite the approval of non-transparent ETFs appearing to be a few years away, we already see that some promoters of actively-managed mutual funds start to build a footprint in the European ETF industry by offering ETFs that do not replicate a plain-vanilla index.

Instead, those ETFs are based on indices which are somewhat active. While some of those managers have chosen to build their own ETF platforms, others may use so-called white-label platforms because it can be very expensive for an asset manager to set up a fully-fledged ETF infrastructure.

This makes it easier for smaller asset managers to use the existing infrastructure of a white-label ETF platform to launch and maintain their ETF offerings. In other words, white-label ETF platforms can foster the future growth of the overall ETF industry by enabling smaller or boutique asset managers to use the ETF structure as a distribution wrapper for their portfolios. On the other hand, the demand for white-label solutions will lead to the launch of new respective platforms in the future. That said, we have seen this already with Goldman Sachs and Waystone launching white-labelling services in 2022.

A Europe-wide adoption of ETFs by retail investors will in combination with new fit-for-purpose conventional as well as ESG-related bond and equity products be the core drivers for the future growth of the European ETF industry. But a possible approval of active ETFs would be a game changer for the whole fund industry ecosystem in Europe and will make the forecast of a doubling in AUM obsolete as in this case, the growth rate of the AUM might be much higher.

Detlef Glow is head of Lipper EMEA research at Refinitiv, an LSEG business

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