In the 15 years since the first ETF was listed in Europe, the industry has rocketed to $532bn (£345bn) in assets under management, with BlackRock predicting in April that AUM will top $1tn by 2019.
However, Sleep, senior portfolio manager at 7IM, believes that while the forecast is a considerable sum, it is understating the potential of the European ETF space.
“It is a conservative estimate,” he said. “Given that European ETF assets have gone from less than $100bn to $500bn in five years, it is easy to see how assets can reach $1.5tn [by 2019], and that is before we factor in smart beta, active managers and traditional beta. With the addition of those the market could be worth $2tn, and even $3tn at a stretch, given the exponential rate of increase.
“If we look at historical trends for ETF AUM in Europe, Middle East and Africa, for a year after the financial crisis it went sideways, but since then it has risen considerably and we are going to see more money coming in from retail investors as they get used to the idea, along with more from institutions.”
Casting your net on the continent
While Sleep conceded that lower costs are a key component, he cited managers’ desire to access wider client pools along with increased understanding of the asset class as influential drivers.
“It is not just lower fees,” he expanded.
“There are already a few active managers that use ETFs as a conduit – especially UK-only managers, because it gives them a pan-European reach which anyone can buy. Because there is no legal requirement in the Europe to disclose all of your positions, as there is in the US, we will see more and more active managers adopting ETFs as a route to the market.
“For example, as a UK-only fund manager we are posed with the question: how are we going to reach Italian, German and Spanish clients? Instead of setting up a Luxembourg-domiciled fund, we just get an ETF set up which we can then fast-forward into Dublin, Madrid and so on.
“The growth in popularity has been a slow grind, but we have the retail distribution review in the UK and Holland, and the rest of Europe is going to follow, which is another tailwind.”
Bigger slice of the pie
Fixed income ETFs have been closing the gap on their equity counterparts, with the former category’s AUM surging ten-fold since the financial crisis to just under $500bn compared to around $560bn in equity mandates – a gap less than half of what it was in 2008.
It is this rising appetite for financial safety, coupled with a widening range of products across the asset class spectrum and increased accessibility that Sleep believes can push European ETFs beyond the $3bn mark.
“People are buying lower-risk investments, while equity continues to go up as well,” he said. “There are also cash ETFs, which have been around for some time, and commodities – there is increasing demand for the whole breadth of products.
“Within tracker funds – which include ETFs – market share is growing quite quickly [12.1% of gross retail sales as of April, according to Numis Investment Companies Research] and there is no reason why it cannot increase further, both from existing money and new flows.
He continued: “Also, if we look at retail sales channels, platforms made up 53.5% of sales in the 12 months to April, despite most platforms not handling ETFs. Post-RDR, a lot of people are less willing to pay an IFA and prefer to do it themselves.”
“There is a lot going on: the way people are buying; increased accessibility; RDR is helping; markets are moving up; understanding of ETFs is growing; fees are coming down; active managers will use more of them. All of this will contribute to ETF AUM and market share increasing.”
