Exchange-Traded Funds

Europe Races into ETF Fast Lane

  • Why it matters

    Why it matters

    The ETF market continues to grow faster in the United States than in Europe, but there are signs that this trend could be reversed in coming years.

  • Facts

    Facts

    • At the moment, 109 ETFs each manage more than €1 billion ($1.1 billion) in Europe. They have a combined market share of 58 percent.
    • The Blackrock subsidiary iShares has the largest market share in both the United States (39.6 percent) and Europe (47.5 percent).
    • Last year €355 billion flowed into index funds worldwide — €215 billion into the United States and €72 billion into Europe.
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    Audio

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Europe's ETFs are pushing hard for new business. Source: Getty Images.

Exchange-traded index funds, or ETFs, are marketable securities that track an index, commodities, bonds or a group of assets. They can be traded like common stock on an exchange and are considered especially transparent.

So it was all the more surprising when the investment company Eaton Vance brought a new ETF to the U.S. market early this year — one that runs counter to the claim of transparency made by traditional index funds.

In contrast to other ETFs, the new fund doesn’t declare each day what securities are in its portfolio, but only each month. ETF providers are now even considering publishing the composition of their funds once per quarter.

Whoever wants to know the direction in which the European ETF market is developing needs only to take a look at the United States, because what happens there is often imitated in Europe.

In a certain sense, the U.S. market for ETFs is the precursor of this investment category. The first index funds were set up there in the 1970s, but it wasn’t until the turn of the millennium that they made their way to Europe.

European managers expect a significantly higher growth rate for their market — nearly 250 percent— from the current $460 billion to $1.6 trillion in 2021.

Today, the American ETF industry continues to set the tone. But this could change: Europe is increasingly casting off the tethers.

The ETF market continues to grow faster in the United States than in Europe. Last year €355 billion, or about $385 billion, flowed into index funds worldwide, according the ETF provider Lyxor. Investors put €215 billion of that into the United States and €72 billion into Europe.

But a survey of ETF managers by the consulting firm PwC shows this trend could be reversed in coming years.

It found that U.S. managers calculate an increase of 181 percent in the volume of the U.S. index-fund market, to $2.1 trillion by 2021. European managers expect a significantly higher growth rate for their market — nearly 250 percent— from the current $460 billion to $1.6 trillion in 2021.

The PwC study shows that managers identify different engines of growth in various regions. The ETF industry hopes to boost sales in the United States through new marketing platforms. Providers in Europe are looking for a higher influx of capital through declining costs and increasing knowledge about ETFs among customers. These two factors are less important to U.S. managers.

Price competition is also significantly tougher in the United States. “Scarcely a month goes by without an ETF provider lowering the cost of at least one product,” said an expert.

Here as well, Europe is catching up. The cost of many index funds has fallen in past years, due in part to new competition.

In both the USA and Europe, iShares has the largest market share. In the United States, the BlackRock subsidiary has 39.6 percent of the ETF market; in Europe, the figure is 47.5 percent.

No other provider is remotely as big as iShares in Europe. The second-largest provider is Deutsche Asset Management with 12.5 percent, followed by Lyxor with 10.6 and UBS with 5.5 percent. Other providers — including Amundi, Vanguard, State Street, Source and the DEKA subsidiary ETF Lab — lag far behind.

In the United States, however, iShares has two strong runners-up: Vanguard with 23.4 percent, and State Street with 19 percent of the market. They are followed by providers such as Invesco Powershares, Wisdom Tree and First Trust.

So it is little surprise that competition between the three top dogs is tougher in the United States. Vanguard in particular is known for fighting for market share with aggressive cost reductions. Last year, that strategy propelled the company ahead of State Street into second place. Its next target: top position.

Vanguard has the largest current ETF— the Vanguard Total Stock Market fund with some $450 billion. The next positions are occupied by several Vanguard and iShares products.

It’s difficult for small providers to break through the market power of the top dogs. Investors tend to put new money in those investment funds that already manage large sums, according to an evaluation by the data provider Thomson Reuters Lipper.

There’s a reason for this: Size and liquidity are particularly important for institutional investors, which make up the lion’s share of capital in ETFs.

At the moment, 109 ETFs each manage more than €1 billion in Europe. They have a combined market share of 58 percent. “These products dominate the market,” said the experts at Lipper.

It is similar in the United States, but Lipper sees no reason to worry in the high concentration. New ETF providers repeatedly enter the market and succeed in heating up the competition.

It’s unclear which providers or which product innovations will prevail in Europe in coming years. Vanguard has improved its position in the European market but still doesn’t play a big role and isn’t known to many investors.

This shows that what is successful in the United States doesn’t necessarily work in Europe. The European ETF market is increasingly following its own rules.

 

Julia Groth specialises in corporate finance and exchange-traded tracker funds. To contact the author: groth@handelsblatt.com

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