The European ETF market may be competitive but it should also be seen as an area of growth for an asset management industry under pressure in its traditional stronghold of active management.
Hence, the news that DWS’s Xtrackers brand might be up for sale, either separately or as part of the parent company, was the prompt for speculation over which providers might look to either expand or establish their footprint in the ETF arena.
The names subject to speculation regarding DWS are, by definition, large entities already; it would not surprise anyone if one of the likes of Allianz, Amundi or JP Morgan opened up their corporate piggybanks to pick up a prized position in the European ETF space.
But which other names might we expect to enter the market in the months and years to come? And what might be the prompt?
On the second question, Nicolas Rabener, managing director of Factor Research says that it will be fear of missing out on a sizeable and growing market that will have the top brass at many non-ETF asset managers sweating under the collar.
“Running a large asset management company without an ETF franchise might feel somewhat like watching an approaching tsunami from the beach,” he says.
With each of the big three pushing fee levels ever lower – and even threatening to get to zero – it is creating pressure on more traditional active managers. No wonder there is much speculation over who might end up with Xtrackers which has the already existent product depth to enable entry into such a competitive area.
But the rise of smart beta does afford more opportunities for any asset manager hoping to establish a foothold away from the big battle over plain vanilla index huggers.
Oliver Smith, investment manager at IG Portfolios, suggests there are “still questions over whether actively managed ETFs will really take-off versus their active fund equivalents”.
“The big blocker to actively-managed ETFs is that the daily disclosure of their holdings, and intra-day liquidity, places restrictions on the companies that a portfolio manager might look to buy, potentially diluting their expertise,” he says.
Still, none of this is likely to halt new entrants weighing up the difficulties versus the opportunity. To smooth the way, the white-label issuance model, common in North America, has been brought to Europe, providing asset managers with a somewhat simplified route to market.
One such is HANetf and Hector McNeil, co-founder and co-CEO, who says the sheer size of the European opportunity will help focus minds.
“The US ETF market is $4tn of AUM and US as a whole is about 40% passive. Europe, with 1.5 times the population and a similar wealth demographic, has $850bn in ETF AUM and less than 10% overall in passive,” he points out.
"The US will grow to between $6trn and $7trn but Europe will grow three-or four-fold, so the accelerated growth opportunity is here." The majority of the top 20 US asset managers already have an ETF capability, but the same cannot be said in Europe.
As barriers to entry fall, he says, and new routes to ETF market entry appear more asset managers will want to launch ETFs in Europe. “Both those with existing US ETF businesses and completely new entrants,” he adds. “In my honest opinion, we will be as big if not bigger than US but we are just behind.”
Filling the breach
The current list of big-name providers – State Street, BlackRock (either with or without the iShares moniker) and whoever ends up with the Xtrackers brand – will no doubt be hoping to drive this growth. But if McNeil’s prediction is to come true, then it is likely some more names will need to throw down collective gauntlets.
Here is our initial run at some names to look out for. Not all of them are completely new to ETFs; some have existing ETF offering in the US, others are already small players in the Europe. But each are among those poised potentially to further their European ETF footprint.
Clearly a huge fund house and according to industry rumours, the company has looked at launching an ETF offering multiple times. Our sources suggest that smart beta and active would make a lot of sense for them with multi asset and fixed income being obvious avenues.
As one source suggested, taking the ETF Stream tagline, BNY Mellon is a “massive passive player” and also provides a lot of ETF plumbing like admin and custody. With the European brands at its disposal such as Mellon, Insight, Newton, it would seem areas such as thematics and smart beta would make a lot of sense.
‘Staberdeen’ already has a small footprint in ETFs, albeit in the US via the acquisition of the ETF Securities US business. Again, there are industry rumours that the company will be taking a bolder step into Europe and again, smart beta and active ETFs would seem to be a good fit.
This company has what one source suggested was a “great ESG and impact investing brand”. Given the emphasis on environmental, social and governance ETFs in the past year or more, a move in this direction would seem to make a lot of sense. Add lots of value into the ETF space.
Another big US player that is yet to enter the European ETF space. Sources point out the company has some dent great sub brands and strong products such as the RARE property mutual funds. A London – or Amsterdam, Dublin or Frankfurt – move might make a lot of sense.
Very similar to Legg Mason, Nuveen is another global player that, as it stands, does not have an ETF offering in Europe. Should others make moves into the European ETF area, it seems unlikely Nuveen would simply stand on the sidelines.
ETF Insight is a new series brought to you by ETF Stream. Each week, we shine a light on the key issues from across the European ETF industry, analysing and interpreting the latest trends in the space. For last week's insight, click here.