Launching more ESG ETFs and expanding into new countries are the two key priorities for ETF issuers in Europe over the next two years, according to research conducted by Cerulli Associates.

The research, which surveyed 37 European ETF issuers with $832bn assets under management (AUM), found 57% of respondents cited expanding their ESG ranges as a “high priority”, the highest factor highlighted in survey.


Source: Cerulli Associates

ESG ETFs in Europe have exploded over the past two years with assets reaching $41.1bn by the end of May, up 28% from the end of 2019.

This dramatic increase has not gone unnoticed by ETF issuers which have launched products at a rapid rate this year.

According to data from Morningstar, there were a record 46 ESG ETF launches in Europe in the first half of the year, 11 more than the previous highest for an entire year set in 2018.

Fabrizio Zumbo (pictured), associate director, European asset and wealth management research at Cerulli Associates and author of the report, said the narrative behind ESG was currently very strong following the performance during the pandemic.

He added ESG is on the rise in all European countries and most notably in France where requirements for pension funds to report ESG standards have further driven investor appetite.

“Issuers have a significant opportunity to develop products in this area, but they will need to ensure that their products are well understood and can deliver on all fronts in order to stand out from the crowd,” the report stressed.

Meanwhile, expanding into new countries scored the second highest with 27% of ETF issuers highlighting this as a top priority over the next two years.

In particular, Zumbo highlighted the Italian and Spanish markets as two key countries of focus for ETF issuers due to the lack of a single dominant player.

The big ETF issuers in Europe have deep-rooted ties in regions with DWS dominating Germany, UBS Asset Management in Switzerland, Amundi and Lyxor in France and BlackRock’s iShares business in the UK from when it was run by Barclays up until 2009.

The rat race to become Europe’s number two ETF provider

While it is hard to break into these markets for the remaining issuers, Italy remains somewhat of an untapped region and ETF adoption is already at relatively high levels.

However, the issue with Italy, as well as Spain, is banks continue to control the majority of distribution and therefore have a preference for more expensive mutual funds due to the greater fees they receive.

“There is no one strong player in Italy yet,” Zumbo continued. “Italy has around $1.3trn sitting in deposit accounts, a huge pool of money that could end up in ETFs.”

Overall, the report said the fastest ETF growth is likely to take place in Switzerland and the UK where 50% and 45% of respondents, respectively, predicted the ETF market to expand at an annual rate above 10%.

Some 35% of ETF issuers surveyed in Europe see the increasing ETF adoption from institutional investors as the major driver of asset growth over the next two years.

“The European ETF market has become increasingly crowded in recent years, with new players arriving and incumbents broadening their product ranges,” Zumbo said.

“Entering these markets with a standard value proposition may no longer be enough to attract flows from sophisticated investors.

“ETF issuers should develop specialized offerings with robust and diversified ESG value propositions, including active and smart beta products, to differentiate themselves.”