ETF market share in Europe remains half the global average

ETPs represent only 7% of fund assets in Europe

ETF market share in Europe is significantly lower than other continents despite continued innovation, outperformance and record flows in recent years.

According to Bloomberg Intelligence data, liabilities have nearly doubled from 10% of mutual fund investments to just under 20% in less than a decade.

That growth has been led by ETFs, with packaging pressuring active managers to cut costs while global liabilities have outperformed all but 16.7% active managers over the past decade, according to the dashboard. SPIVA from S&P Dow Jones Indices.

In a report titled European ETFs have a small bark but a bigger bite for fund fees, Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said he expects further growth in ETFs on this side of the pond due to “cost pressures and underperformance of active funds.” .

“Investors in the region prefer ETFs to index mutual funds, likely attracted by the introduction of new innovative strategies such as ESG and themes.”

Despite these seemingly positive trends, ETFs remain a relatively underused tool in the arsenal of European investors.

Exchange-traded products (ETPs) make up 20% of the $35 billion fund market in the Americas, 14% of fund assets globally, 9% in Asia-Pacific but just 7% in Europe, as of July 15 .

Source: Bloomberg Intelligence

Interestingly, this number remains unchanged from when global ETF assets passed the $10 billion mark last November and is driven by the same lingering issues of fragmentation, lack of tax efficiency for models packaging and distribution that still rely on fees or retrocession fees, noted Psarofagis.

Retrocession fee models remain in place in many countries on the continent, encouraging banks and advisers to push investors towards more expensive funds in exchange for hefty fees.

The report also suggests that while European passive ownership is currently higher in equities – at 30% of equity securities – the 17% ownership currently claimed by passive fixed income products may have greater growth potential in a near future, given the current interest rate environment and €10 billion inflows for bond ETFs while fixed income mutual funds see outflows.

The passive race to the bottom on fees

Another calling card of ETFs is their relatively low fees, which continue to fall.

“There were 52 fee reductions in the first five months of this year, averaging 8 basis points, while in 2021 there were 135,” Psarofagis said. “As the industry continues to grow, we expect the advantages of scale to open the door to further fee reductions.”

This aggressive race to the bottom will continue to put pressure on active managers. The asset-weighted average fee for an active equity UCITS fund is currently 1.28%, a figure that has risen from 1.40% since 2017, but is still well below the average fee for passive equity ETFs and bonds by 0.23%.

Source: Bloomberg Intelligence

One point to note is that while the average European asset-weighted ETF charges 0.23%, the equally-weighted average is 0.42%, which has increased slightly following a ramp up in non- vanilla such as ESG and thematics.

Despite this, Psarofagis said flows still tend to head towards the cheaper ETFs, with a diversified, multi-asset ETF portfolio still possible for a weighted average fee of just 0.08%.

Source: Bloomberg Intelligence

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Mary I. Bruner