The fight for second place in Germany’s premier soccer league, the Bundesliga, is often more interesting to watching than the leader – if only because Bayern Munich, currently the top team, is usually too far ahead to catch. It’s a similar story with the European market for index-tracking, exchange-traded funds – ETFs for short. BlackRock, the world’s largest ETF manager, has streaked well ahead of its rivals. Currently, the most exciting tussle is for second place, where recent turmoil at home stands to bump Deutsche Bank down the rankings.
The European ETF market is still in its infancy, having been founded only at the start of the millennium. After many boom years (and incredibly, despite the financial crisis of 2008-09), its capitalization in Europe has swollen to an impressive €572 billion ($643 billion). Their drawing power? People warm to investment vehicles that are transparent, liquid and cheap, and ETFs fit the bill. The instruments offer easy access to roughly any asset class, geographic region, sector or strategy, and usually offer lower fees (and better tax incentives) than, say, mutual funds. BlackRock, the world’s largest asset manager, has cornered almost half of this highly concentrated market.
“Deutsche Bank's negative headlines had a definite effect.”
For years, the number two and three spots seemed locked up: Deutsche Bank subsidiary Deutsche Asset Management, and Lyxor Asset Management, a unit of French bank Société Générale. But then came a sudden, remarkable shift. “One year ago, we were still some €10 billion behind Deutsche Bank,” said Arnaud Llinas, head of Lyxor’s ETF division.
Since April, this changing of the guard is borne out by the statistics. Although Deutsche Bank has a capital of €58.2 billion, Lyxor has edged ahead and now manages a slightly higher amount, at €58.6 billion (see graphic). “We want to maintain this second place in Europe and keep growing faster than the overall market,” Mr. Llinas said.
Last year, the rankings began to shift. Investors withdrew €5.3 billion from Deutsche Bank’s asset-managed segments, while Lyxor’s grew by €1.8 billion. “Deutsche Bank’s negative headlines had a definite effect,” said Markus Ohlig, an analyst at Greenwich Associates in Zürich. “Unexplained questions about the future strategy of the entire asset management of Germany’s most important bank were also in the mix,” he added. In the meantime, one key point has been resolved: The Frankfurt-based bank is preparing for a partial IPO of its asset-management unit.
Despite all good intentions, restructuring Deutsche’s range of managed investment products is proving to be a burden. The topic has been on investors’ minds for quite some time. To wit, they want index funds that hold securities that are actually in the fund, rather than index funds merely based on bank guarantees for index performance. Deutsche Bank’s ETFs originally relied on these guarantees.
“We have been doing [the portfolio restructuring] on a continuous basis, and are now almost on target with this conversion,” said Simon Klein, sales manager of the European ETF unit of Deutsche Asset Management. He’s setting his hopes on future business, which will focus on lower fees, customer care, and the market for high-net-worth individuals in Switzerland. “We are now gathering speed. Our business is going to pick up, and the current ranking of suppliers will remain as it is.” That is, with his employer in second place.
As before, investors are going after ETFs for popular equity indices such as the S&P 500, Euro Stoxx 50 and Germany’s DAX stock index. However, in emerging bond ETFs, the product portfolio is growing rapidly, as is investor demand. This also applies to boutique equity concepts, such as new ways of calculated indices, or trendy strategies such as sustainable investment. Lyxor and Deutsche Asset Management are moving in this direction.
However the rankings race pans out, the ETF market is likely to keep expanding. Volumes in Europe and worldwide continue to surge to new records. Llinas has already set his sights on the next significant milestone. “Within two years our European [ETF] capitalization will hit the €1 trillion mark,” he forecasts. Just to put this bold prediction into perspective, the capitalization of the entire global ETF market was something like $3 trillion (€2.7 trillion) in 2016.
Ingo Narat is an editor with Handelsblatt’s finance section. To contact the author: email@example.com