In a report, entitled A Guided Tour of the European ETF Marketplace, analysts said the rise of ETFs could lead to passives making up 25% of the European fund market by 2025.
The rapid growth of ETFs since the Global Financial Crisis has been well documented. In Europe, have risen 38% over the past two years to €760bn by the end of March, with ETFs accounting for 8.6% of total AUM in European investment funds, up from 5.5% in 2014.
Morningstar analysts predict this rapid adoption will continue. One key factor for this growth is the introduction of MiFID II, which came into effect in January 2018.
The regulation’s focus on improving transparency across the European asset management industry is a positive for ETFs. The report said it imposes tighter restrictions on “generous” commission payments asset managers have been able to pay fund distributors in return for selling their products.
Hortense Bioy (pictured), director of passive strategies and sustainability research at Morningstar, and co-author of the report, commented: “This allows the true cost of a fund to be seen more clearly and should play in favour of low-cost ETFs.”
Furthermore, MiFID II has increased reporting requirements for over-the-counter trades, which account for around 70% of ETF transactions, meaning investors have a better understanding on the liquidity individual ETFs.
Although the directive did not force asset managers to create a consolidated tape for OTC reporting, a group of ETF providers in Europe including iShares, Lyxor and Xtrackers, joined forces with Bloomberg to launch one themselves.
“This is good news for investors and should lead to increased trading efficiency and ultimately lower trading costs for ETFs,” Bioy added.
Furthermore, the European ETF client base continues to remain institutional in nature with around 80% of ETF assets in Europe predicted to be held by non-retail.
ETF providers are yet to tap into the retail investor community however, the report said ETF providers predict this will play a key role in supporting growth of the ETF market.
“Low-cost mainstream market exposures are the preferred building blocks across most offerings,” Bioy continued. “With their focus on technology and web-based customised service, robo-advisers like Nutmeg, Moneyfarm, or Scalable Capital appeal to the growing body of cost-conscious retail investors.”
Plain vanilla products continue to dominate the European ETF space, influenced mainly by the fragmented nature of the market. Numerous asset managers offer the same products as a result with 13 separate providers offering ETFs tracking the Euro Stoxx 50, for example.
This is why, the report said, there are more ETFs listed in Europe than in the US, despite being one-fifth smaller in AUM terms.
ETF providers continue to launch plain vanilla ranges with Amundi unveiling a suite at with 0.05% TERs earlier this year, while Legal & General Investment Management launched a core range last October.
“In some cases, launches fill gaps in providers' offerings, while other providers see an opportunity to compete on price,” Bioy commented. “Irrespective, the end result is further fragmentation.”
Other areas where Morningstar analysts are seeing product proliferation is in multi-factor strategic beta strategies, ESG and thematic ETFs, while active ETFs are yet to take up and makeup just 1% of European ETF AUM.
“The arrival of new providers may act as a catalyst for change,” Bioy said. “JPMorgan has been particularly keen on using the ETF wrapper to deliver some of its active strategies.
“In fact, it has become the largest provider of actively managed ETFs in Europe by number of products, launching ten funds (six fixed income and four equity) in 2018.”
iShares continues its dominance as the leading ETF provider in Europe however, its market share has fallen to 44.6% from 46.4% two years ago. It controls the fixed income ETF space with 60% of the assets.
Xtrackers, Europe’s number two providers, has made significant progress with its market share climbing to 11%, up from 9.8%.
The report noted the flurry of M&A activity over recent years with LGIM’s acquisition of Canvas, WisdomTree buying ETF Securities and Invesco snapping-up Source to name a few. “The world’s largest asset managers have entered the arena and have begun to flex their muscles.”