Can the rest of Europe keep up with the growth of its largest ETF market?

Europe is home to some of the major players in the ETF industry and the past few years have brought a healthy level of growth for the package, however, investor appetite, particularly from the retail market, remains relatively subdued.

ETF flows recorded another bumper year across the continent last year, with net inflows reaching $195.3 billion – a significant increase from the $113 billion recorded in 2020 – while assets under management (AUM) exceeded $1.6 billion.

Germany, in particular, has grown at a substantial rate, becoming the largest market in terms of ETF investors, with a market share of 27% ($432 billion), according to research by Blackwater Search. and Advisory, ahead of the United Kingdom (400 billion dollars). ) and Italy ($224 billion).

Source: Blackwater Research and Reviews

Considered the next United States in terms of ETF growth potential, Germany has shed the light on low-cost, transparent and easy-to-understand ETF savings plans that have seen its investment base more than double for reach three million in 2021.

While countries across Europe have benefited from some of the same growth tailwinds as Germany over the past couple of years – the rise in do-it-yourself (DIY) investing and interest in ESG – a fragmented market, a lack of consumer awareness and the absence of similar savings plans are holding back other areas.

“The education hasn’t been there across Europe and people just don’t understand ETFs as the market led by financial advice doesn’t play fair and shows investors the full game of what they’re into. can invest,” Michael O’Riordan, founding partner of Blackwater Search and Advisory, said. “In Germany, savings plans force investors to take more ownership of themselves.”

Land development

Despite being the second largest ETF market in Europe, the UK is largely dominated by the private banking sector, according to O’Riordan. Home to JP Morgan Private Bank – one of the largest ETF buyers in Europe – much of the UK ETF market is powered by these institutions.

Additionally, initiatives such as the Retail Distribution Review (RDR), first introduced in 2012, have not shifted retail investment as much as expected.

Caroline Baron, head of ETF distribution for EMEA at Franklin Templeton, said: “After the RDR, the industry thought retail adoption would increase. That it was going to be like in the United States where the market is 50% retail. Ultimately, the market rose, but not massively. »

Other countries, such as Spain, actively discourage ETFs through tax penalties for switching to an ETF that does not exist for mutual funds.

“This is clearly a disincentive to investing in an ETF and is the result of lobbying by the mutual fund industry in Spain,” O’Riordan said. “Spain is a market where everything is distributed by the big banks. The asset management industry establishment has tried to introduce tactics to keep ETF vehicles in their box.

He added that investing in Spain is still mostly done by going to high street bank branches, a picture which is “quite similar across Europe”.

In France, the retail market remains subdued and although there is no ETF savings plan similar to Germany, there are life insurance plans through which individuals can choose to save in a AND F.

Italy seems to have the opposite problem. The retail market, which accounted for 21% of transactions in 2021, according to figures from Borsa Italiana, is larger and slightly more established with leading robo-advisors such as Moneyfarm offering access to a range of ETFs, however , the market is pushing for more institutional demand.

Silvia Bosoni, Head of ETFs, ETPs and Open Ended Funds at Borsa Italiana, said: “In Italy, retail was in place at the very beginning. 2020 has been a big push for institutional investors to understand ETFs and what they offer.

Market Barriers

One of the biggest problems facing Europe at large is education, O’Riordan said.

“The level of education at the retail level is grossly insufficient,” he said. “Most people have never even heard of the term ETFs, let alone mutual funds. They are entirely dependent on their banker.

“If people knew what they had, they could take more ownership.”

Brieuc Louchard, head of ETFs at Euronext, said one of the main reasons the European retail market was struggling was market fragmentation.

He said: “One of the main issues is that an ETF is listed on five different markets. This leads to fragmentation of market maker quotes and dispersion of liquidity.

“Any move towards a more concentrated market with more volume traded on exchanges relative to institutional ones would lead to more liquidity, better spread and encourage greater participation from retailers.”

Source: PwC, end of June 2021

Baron said the UK had come a bit far in forming the ETF, but there was still a long way to go.

“A lot needs to change in Europe before we see mass adoption in retail,” she said. “The platforms in the UK are still quite old fashioned in some ways and many of them cannot meet the needs of ETFs, so adoption has been slower than expected.

“There is a train moving there, but contrary to what ETF providers thought many moons ago, it has been much slower.”

O’Riordan agreed that the adoption of ETFs across Europe will be a generational change rather than an overnight coup.

He said: “It will take generations to change. As the younger generation becomes more comfortable investing in technology, that’s where the real change will come.

“If you rely on governments to change the structural pension procedure, it will take forever.”

Green shoots of growth

Much like in Germany, the pandemic has had a significant impact on the number of retail investors trading in the market, giving the sector reason for optimism.

According to Euronext, around 5-6% of average daily trades across six exchanges came from retail investors in the five years to 2020, which rose to 14-15% in 2020.

Louchard said: “What’s interesting is that it’s stayed at this level for the whole of 2021. We’ve spoken with a large retail broker and some online retail brokers and they both said that they had managed to gain new customers thanks to the fact that people were at home.

“It was clear that an ETF was one of the most successful vehicles because you understand what you’re doing in terms of exposure.”

He added that French retail investors are starting to use ETFs more and more in their life insurance plans, but it remains at a low level.

Baron said she can see the growth of retail platforms in Germany spilling over to the rest of the continent, while more independent financial advisers can improve product education.

“The platforms are busy, we work a lot with a few platform chairs in Germany and we see a change there that will last and intensify. Therefore, I hope it will also apply to the rest of the countries,” she said.

“If I look at Italy, you see more and more independent financial advisors turning to us for more information. They are keen on pushing the story because they are agnostic.

Louchard added: “For retail, ETFs are moving at a much slower but slightly growing pace. When we talk about it with the major European issuers, the heart of their strategy is to penetrate even more into retail.

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Mary I. Bruner