Digital platforms are fueling the growth spurt of European ETFs


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European fund investors have for years been the poorer cousins ​​of their American counterparts, paying higher fees and finding it harder to access low-cost, passively managed products.

Digital platforms offering exchange-traded funds, however, seem poised to bridge this gap.

Traditional broad-based ETFs are widely regarded as good building blocks for retail investor portfolios, eliminating much of the opacity and high fees frequently associated with other fund investments.

Moreover, their widespread adoption could also spark wider changes in the investment landscape.

“We believe dynamic ETF markets are putting pressure on open product fees. As inherently “clean” share classes that exclude upfront fees and ongoing commissions, ETFs are particularly well suited for use in unbundled advisory programs, which we believe is industry best practice. said Morningstar in its recently published Global Investor Experience report. “Bundled” advice is built into the price of the investment rather than paid for separately.

At first glance, the report suggests that not much has changed since its previous publication in 2019. The Netherlands is still the only European country to jostle with the United States and Canada in the top rankings of researchers for diets. investor-friendly pricing.

But while Morningstar says ETF adoption is a crucial indicator of healthy markets, it doesn’t use that data to compile the rankings in its report. A closer look at the evolution of the ETF markets reveals that things could finally be moving.

“Europe is changing at an incredible pace,” said Salim Ramji, global head of ETFs and index investing at BlackRock. “It is our fastest growing region in the world.”

Inflows into BlackRock’s European-domiciled iShares ETFs jumped by a third, from $60 billion in 2020 to $80 billion in 2021.

Its most dynamic market is Germany, which has seen exponential growth due to the rise of ETF savings plans, often accessed through online platforms or apps. Data from extraETF shows that the number of German ETF savings plans increased from 500,000 in June 2017 to almost 5 million at the end of March. BlackRock expects that number to reach 20 million by 2026.

Separate research published last year by Blackwater Search & Advisory came to similar conclusions.

“We have identified Germany as the largest ETF market [in Europe] with over $400 billion in ETF assets. The current hype for Germany is driven by the rapidly increasing level of retail adoption there. This is driven by individual savings plans,” said Michael O’Riordan, founding partner of Blackwater.

The UK was Europe’s second-largest market with more than $350 billion in ETF assets, Blackwater found, followed by Italy, France and Switzerland which together accounted for $510 billion. i.e. one third of the European total.

However, O’Riordan said the level of participation from retailers in Europe remained “pitifully low”.

Traditional sales and distribution channels are partly to blame for the huge disparity in retail adoption between Europe and the US, where half of the ETF market is retail, against only 10% in Europe.

O’Riordan blamed this on a “protectionist mentality” in the mutual fund industry.

There are too many interests at play who have taken it upon themselves to prohibit the growth of ETFs, which of course pay no retrocession fees,” he added, referring to payments often made by ETF providers. funds to distributors who sell their wares.

Better Finance, an investor rights organization, cited France, where most retail investors are funneled into savings-insurance products linked to high-cost unit-links, as an example of how whose traditional distribution methods can work against investors.

“In France, for example, it’s outrageous,” said Guillaume Prache, managing director of Better Finance.

A recent communication from Better Finance revealed that although insurance products were the most widely used retail savings products in France, they had, “on average, [after inflation and fees] losses for savers over the past 20 years.

However, even in France, the Morningstar study saw the beginning of a significant evolution of the market. He found that while ETFs represent only a minority of retail investors’ assets, the number of French retail investors who traded ETFs increased by 63% between 2018 and 2020. He said the use of ETFs was stimulated by online platforms and emerging robotics. advisors who offer portfolios based on ETFs as well as the provision of life insurance coverage with ETF options.

Things change. The ETF as a clean fee product might not have been attractive to traditional banks. However, investor demand is changing that,” said Sebastian Külps, B2B business development manager for Vanguard in Germany and Austria.

However, organizations such as Better Finance believe things are not changing fast enough. Its recent report, published in February, called on regulators to ban retrocession fees across Europe. At the moment they are only banned in the UK and the Netherlands.

Vanguard has been another voice campaigning for change, releasing a European Manifesto in 2020 calling for the elimination of potential conflicts of interest that can arise from commission-based sales models.

“Where consumer money is invested, it should not be influenced by the existence of payments to intermediaries by product providers. However, in large parts of the EU this risk still exists,” Külps said.

However, Külps said he was encouraged that investors increasingly understood the impact of costs on returns, a view echoed by BlackRock.

“What we’re seeing around the world is that when digital platforms remove barriers to ETF commissions, millions of investors often turn to ETFs for the first time,” Ramji said.

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