ETF demand: Americans are the hares to Europe’s tortoises

The benefits of ETFs have fuelled a surge in their popularity in the US over the past decade, but European private investors are harder nuts to crack.

Investor interest in passive investment continues to grow at a healthy clip across the globe, and investors in ETFs are leading the charge into passive funds. This is particularly the case in the US, where ETFs have become akin to a default investment option.

In the UK and mainland Europe, the trend is also positive. Flows into ETFs in the first four months of 2019 totalled €30 billion (£26.5 billion). The value of assets invested in ETFs in Europe is nearing €800 billion (£710 billion), up from €200 billion (£175 billion) at the beginning of the decade.

The long-term benefit of low-cost investing is well-documented and is the key driving force behind growth in passive investing. Add to that the ability of ETF providers to quickly offer investors plenty of choice in market exposures when they want it, and one can quickly understand why the growth prospects for the ETF industry remain promising.

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Potential in Europe

There remains, however, a key difference between the US and European ETF markets.

In the US, retail investors and the financial advisers who serve them have fully embraced ETFs, but this is not the case in Europe. There are no solid statistics on ETF take-up by client type, but the consensus view in ETF industry circles is that at least 50% of the close to $4 trillion US ETF market is in the hands of retail investors.

By contrast, in Europe retail adoption of ETFs has been estimated to be around 10-15% of a market that in total is just one-fifth the size of its US counterpart.

Within Europe there are variations between countries, and the UK is one where the adoption of ETFs by retail investors is more advanced. However, as whole, the European retail investor community remains largely untapped by ETF providers.

There are many reasons why the ETF market has developed as an institutional client affair in Europe. Fund distribution channels, particularly outside the UK, remain dominated by commercial banks, which favour the promotion of high-margin products,while the transition from commission-based to fee-based advisory models remains a pending undertaking in most countries.

Moreover, where this transition has already taken place – as it has in the UK, under the Retail Distribution Review – several fund platforms serving financial advisers bided their time before investing in the technology required to allow the efficient distribution of funds that trade intra-day, like common stock.

Things are changing, however. ETF providers serving the UK market agree that retail investors could play a key role in supporting the growth of the ETF market in the future. In fact, it is becoming easier for an ordinary investor to access ETFs. Most stockbroker services in the UK now offer ETFs, at very competitive trading commissions. Vanguard, for example, offers a commission-free trading service for its proprietary ETFs specifically targeted at retail clients.

What’s more, the benefits of investing with ETFs have not gone unnoticed by financial services firms serving retail clients unwilling to build portfolios themselves.

Ready-made portfolios partly or entirely made up of ETFs are now offered by fund houses, commercial banks, fund supermarkets and robo-advisers. With their focus on technology- and web-based customised service, robo-advisers such as Nutmeg, Moneyfarm and Scalable Capital appeal to a growing body of cost-conscious retail investors.

European ETF growth is steady – but mainly institutional

Two graphs that illustrate how European ETF growth is steady


Multi-asset options

Many of these firms offer an asset allocation portfolio building service that mixes equity and bond ETFs, and sometimes traditional index funds, to suit various risk profiles. Low-cost mainstream market exposures are the preferred building blocks.

This type of multi-asset investment solution is also offered by key players in the ETF marketplace. Vanguard’s LifeStrategy suite of funds and the recently launched MyMap series from iShares both combine ETFs with traditional index funds.

ETFs have become much easier to access and therefore another tool in the investment toolbox. Provided that access to them is coupled with education about how they work, there is no reason why private investors should not increasingly enjoy their benefits.

Jose Garcia-Zarate is associate director of ETF research, EMEA, at Morningstar.

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