Anumber of tailwinds have helped to fuel the growth in the ETF industry in Europe. It’s hard to believe that April 2018 marked the 18th anniversary of the listing of the first ETF in Europe. Although ETFs are no longer a new product, their growth rate continues to be impressive. And we can see that tailwinds are likely to continue to fuel the growth in assets in ETFs/ETPs listed in Europe.

ETF assets hit new records worldwide

We are seeing continuing net inflows, the increased adoption of ETFs across the full spectrum of investors in Europe, and the advent of new issuers and new types of products. Other catalysts for growth in the ETF industry include regulatory changes, the relative performance and cost of alternative products, and a growing acceptance that ETFs are a solution that can be used by most institutions, financial advisers and retail investors. 

In recent years the growth rate in ETFs has accelerated. In the three years to July 2018 the assets in ETFs/ETPs listed in Europe have increased by 64.2% to reach $828bn (€703bn)1 ; and during July alone the asset total increased by 2.1%. We are on target to meet ETFGI’s 2018 forecast that European ETF/ETP assets will reach $1.32trn by 2025. The $4.6bn in net inflows to ETFs/ETPs in Europe in July marked 46 consecutive months of net inflows. Yet the $37bn in year-to-date net inflows was half the $74bn in net inflows recorded by end-July last year, and $12.2bn less than the $49.2bn average gathered year-to-date for the previous four years.

As at end-July 2018, the European ETF/ETP industry had 2,320 ETFs/ETPs, with 7,845 listings from 66 providers across 27 exchanges in 21 countries.

Institutional use of ETFs/ETPs has increased by 34% between 2010 and 2017. An analysis2 by ETFGI found that 4,691 institutional investors in 53 countries and 7,075 mutual funds in 55 countries reported owning at least one ETF or ETP in 2017. 

The five countries in 2017 with the largest number of institutions using ETFs and ETPs are the US, UK, Germany, Canada and Switzerland. In aggregate, institutions in these countries represent 81.2% of total global users.

Equities regain most favoured status

By asset class, year-to-date investment flows to European ETFs/ETPs as at the end of July 2018 have favoured equities, followed by fixed income and commodities.

Equity ETFs/ETPs gathered $2.3bn in net inflows in July, bringing year-to-date net inflows to $24.7bn. Inflows to equity ETFs/ETPs in 2018 are almost half of the $43.6bn gathered by July during 2017. 

assets invested in european domiciled etfs

Fixed income ETFs and ETPs gathered $2.7bn in net inflows in July, increasing year-to-date net inflows to $8.6bn. Fixed income ETF/ETP inflows have also slowed from the record levels seen in 2017, when net inflows at the same point of the year had reached $19.8bn. 

Commodity ETFs/ETPs saw net outflows of $1.1bn in July. Year-to-date, net inflows are at $3.5bn, more than half the net inflows of $7.6bn gathered over the same period last year.

Overall, equity ETF/ETPs have a 68.1% market share in Europe, followed by a 21.9% market share for fixed income and 7.3% for commodities. Other ETF/ETP types, such as active and alternative ETFs, leveraged, inverse and leveraged inverse funds, have a collective market share of less than 3%.

Regulatory and political trends

In Europe, the use of ETFs and ETPs by financial advisers and retail investors is still low compared with the US. Until recently, in many countries across Europe financial advisers were still paid to sell products. The introduction of the second Markets in Financial Instruments Directive (MiFID II) in January 2018 ended this distribution policy for independent advisers. This will be a benefit for ETFs as ETFs do not pay commissions to those distributing them. 

In the UK, the Retail Distribution Review (RDR), which banned the payment of commission to independent financial advisers for selling products, was implemented in 2013. There has been an increase in the use of ETFs, but the increase has been slower than many expected as a result of many investment platforms not offering ETFs. Many platforms have justified this policy by arguing that there is insufficient demand for ETFs. 

In fact, adding ETFs to most platforms requires a technology upgrade as platforms that have historically offered only mutual funds did not have nor need connectivity to trade. And platforms that have added ETFs typically do not include ETFs in comparisons when a search is done to compare products tracking an index. The UK’s Financial Conduct Authority (FCA) is conducting a review of platforms, which should help to facilitate a more level playing field for ETFs in the future. 

european etf etp 2018 net new assets by asset class

Robo-advisers in Europe account for a small amount of assets but, unlike platforms, most robo-advisers only use ETFs. The passing of significant wealth to millennials, which is expected to take place over the next 10–15 years, will be beneficial to robo-advisers. And assets invested through robo-advisers are expected to grow after MiFID II, as many retail investors do not understand the full costs of using financial advisers. 

MiFID II provides more transparency around ETF trading, which will be helpful as many investors still have a relatively poor understanding of the trading and liquidity of ETFs. MIFID I did not make the reporting of ETF trades mandatory. About 70% of the trades in ETFs in Europe are done on an over-the-counter (OTC) basis. Many investors have embraced using request for quote (RFQ) platforms as an easy way to fulfil best execution requirements. The imminent arrival of Brexit has caused a number of global firms to put on hold plans they had to launch ETFs in Europe. There remains uncertainty on where it would be best to set up and the requirements that would allow products domiciled in Ireland or Luxembourg to be marketed, sold and listed in the UK, or for products domiciled in the UK to be marketed, sold and listed in Europe. 

Competitive trends

The competition within the ETF market continues to intensify as all providers try to find an edge to distribute and grow their assets. The providers of ETFs/ETPs have been competing by lowering fees, creating core product series with lower fees, pursuing distribution arrangements with robo-advisers, via partnerships and through acquisitions. 

ETFs listed in Europe have an asset-weighted average expense ratio of 27 basis points (bps). The cheapest products track fixed income indices, at an average expense ratio of 25bps, while the most expensive are mixed ETFs at 51bps. There are 80 ETFs with an expense ratio below 10bps, while there are 34 ETFs with an expense ratio greater than 80bps.

The ETF market is heavily concentrated both in terms of fund size and fund providers.

As at end-July 2018, 202 of the 2,320 ETFs/ETPs listed in Europe had more than $1bn in assets and held a combined total of $577bn, or 70%, of total European ETF/ETP assets. In contrast, 1,221 ETFs/ETPs have less than $50m in assets. Products that have assets below $100m are generally deemed not to be breaking even.

iShares is the largest ETF/ETP provider in Europe, with $363bn in assets, representing a 43.8% market share. Xtrackers is second with $88bn in assets and a 10.7% market share, while Lyxor is third with $76bn in assets and a 9.2% market share. The top three ETF/ETP providers (out of 66) account for 63.7% of European ETF/ETP assets, while none of the remaining 63 providers have more than a 7% market share.

Gaining scale in individual ETFs and in their overall platform is one of the goals of issuers. In 2017 Invesco completed the acquisition of the Source ETF business, and combined it with the Invesco PowerShares offering in Europe. And a number of issuers of ETFs in the US have recently entered the European market: Fidelity , IndexIQ Advisors, Franklin Templeton and JP Morgan. 

Overall, however, the rate of listing of new funds has slowed somewhat. There were 102 new ETFs/ETPs launched by 22 different providers through the end of July 2018. By contrast, there were 115, 112, 116, 120 and 93 launches over the same period in 2017, 2016, 2015, 2014 and 2013, respectively. The largest number of product launches over the course of a single year was 510 in 2010: then, there were 355 launches during the first seven months of the year.

Year-to-date through the end of July there have been 22 ETF/ETP closures from six providers. In previous years there were 62, 83, 71, 40 and 52 closures over the same period in 2017, 2016, 2015, 2014 and 2013, respectively. The largest number of product closures over the course of a year was 151 in 2016, and the largest number of closures during the first seven months of the year was in 2016, with 832 closures.

There has been an increasing interest from investors for new ETFs/ETPs providing exposure to fixed income, smart beta, thematic and ESG strategies. 

Smart beta is an area of significant focus for ETF providers and investors. In July 2018, smart beta equity ETFs/ETPs gathered net inflows of $6.3bn, marking 30 consecutive months of net inflows and $35.5bn in year-to-date net inflows, although markedly less than the $45.0bn in net inflows at this point in 2017. 

Global smart beta equity ETF/ETP assets have increased by 8.7% from $606bn to $659bn so far in 2018, with a five-year compound annual growth rate of 33.0%, according to ETFGI’s July 2018 global smart beta equity ETF and ETP industry insights report. 

Of this total, smart beta ETFs/ETPs in the US had $581bn of assets, Europe had total smart beta ETF/ETP assets of $52bn, Canada $14bn and Asia Pacific (ex-Japan) $6.7bn. At the end of July 2018, there were 1,235 smart beta equity ETFs/ETPs, with 2,241 listings, from 148 providers on 40 exchanges in 32 countries.

Active ETF and ETPs, another area of interest for providers, account for 2% of the total assets invested in ETFs and ETPs. Assets invested in active ETFs and ETPs listed globally have increased 26.1% in the first seven months of the year to reach a new record of $96bn at the end of July 2018, according to ETFGI’s July 2018 Active ETF and ETP industry insights report. Of this total, $62bn was represented by funds listed in the US, $20bn by ETFs/ETPs in Canada, $9.8bn in Europe and $4.2bn by funds listed in Asia Pacific (ex-Japan).

At the end of July 2018, the global active ETF and ETP industry had 524 ETFs/ETPs, with 640 listings, from 104 providers on 18 exchanges. So far, the active ETF/ETP market is heavily concentrated by asset class: 65.8% of the assets in active ETFs and ETPs are in fixed income products.

Finally, ETFs and ETPs providing exposure to indices with environmental, social, and governance (ESG) exclusions reached a record global high of $20.6bn at the end of July 2018. Assets invested in ESG ETFs/ETPs, increased by 22.6% year-to-date, from $16.8bn at the end of 2017. 

ESG ETFs and ETPs represent a small fraction of exchange-traded products, with less than 0.5% of assets listed around the world. Yet that fraction is growing, as investors increasingly seek to account for the environmental, social and governance impacts of their investment decisions and to generate sustainable returns. From 2012 to 2017 the compound annual growth rate for ESG ETFs/ETPs was 39.5%, versus 19.9% for all ETFs/ETPs. The assets in ESG ETFs in Europe is larger than for ESG ETFs listed in the US. 

Deborah Fuhr is managing partner at ETF