Alarm bells should be ringing across the European ETF industry after the dramatic news BMO has pulled the plug on its operation just four years after entering the market.
It appears BMO wants to focus on the Canadian market where it is the number two ETF provider and has a far stronger brand without facing the extremely high costs of running a European operation.
The Canadian giant has struggled to make a significant impact in the region after capturing just €608m assets despite ETF flows doubling in Europe from $488bn to $960bn, as at the end of October, according to data from ETFGI.
These flows have been captured primarily by the ‘big four’ who 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 to infiltrate the rest of Europe, building up brand recognition and product range even before their US rivals had realised the opportunity.
BMO’s inability to draw in significant flows into the majority of its 13-strong range shows just how tough running a successful ETF business is.
The firm offered differentiated products to the market through its enhanced-income and corporate bond strategies, however, this was still not enough with only one ETF from its range managing to break the $100m barrier.
While offering differentiated strategies is a crucial starting point for any firm looking to break the dominance of the major players, BMO is an example of why issuers need far more than just a good idea.
The fragmented nature of the European market makes distribution a logistical nightmare for issuers without the sales force size of a BlackRock.
Smaller players must decide which region to focus their resources, something that BMO, which had a far stronger presence in the UK than any other country, failed to get right.
It is important to highlight there is no such thing as a European investor. Germany, the UK, France, the Nordics and Italy all offer a completely different set of challenges for issuers.
The low barriers to entry and enormous inflows make launching an ETF suite in Europe an enticing proposition, however, the operational costs and now BMO’s huge decision may make asset managers think twice before diving head first into ETF land.