Introduction
Of the roughly $2.5trn of assets in global ETP offerings at the end of March 2014, approximately $431.2bn were in European-listed products. However the biggest market for these vehicles is the US, with roughly $1.7trn of assets.
Given the fact ETFs are still a growing business in the UK and Europe, is the region’s share of the market set to rise?
David Patterson, head of UK wholesale distribution for passive investment products at Deutsche Asset & Wealth Management (DeAWM), says: “The UK retail ETF market is probably some 10 years behind the US in terms of development. Roughly 50 per cent of ETF buyers in the US are retail investors. This compares with approximately 20 per cent or less of buyers in Europe. Of course the US is by far the world’s largest ETF market.
“The flip side of the coin is that there is significant room for growth in Europe, and in the UK.”
Mark Johnson, head of iShares sales in the UK, adds: “What kickstarted the ETF revolution in the US was the move to fee-based advice, which we’ve just gone through in the UK. It is also being adopted in the Netherlands and is being looked at by other European countries.”
He points out the reason for the uptick in demand was that as people in the US moved to a world where the adviser charged for their time, the opportunity existed for advisers to blend ETFs with active strategies to give the client a more blended solution that used low-cost beta with scarce alpha.
Mr Johnson adds: “We’ve seen the results of that in the UK. Last year our platform sales were up roughly 23 per cent year on year, and we see that as a consequence of the introduction of the RDR here. We are also seeing significant demand in Europe, because more fundamentally there has been a sea change in attitude towards the use of passive instruments.
“More and more investors are looking at creating outcomes rather than necessarily trying to beat the benchmark. In an ideal world you’d look to maximise the benefits of both passive and active strategies to achieve that.”
Mr Patterson says there remains “major scope for the UK ETF market to expand, driven by several factors”.
He explains: “The RDR has created a level playing field for ETFs versus other products, which means more advisers should be minded to channel their clients into ETFs in one form or another – for example, I expect many more retail investors to start using model portfolios constructed purely of ETFs. We’re really still at an early stage in terms of the retail potential of ETFs in the UK. More broadly, more investors are starting to choose low-cost, index-tracking solutions such as ETFs to meet their long-term investment needs. The shift towards low-cost passive is a long-term trend that I don’t see changing.”
With the RDR requiring advisers to look at all the investment options available if they wish to offer a whole-of-market proposition, ETFs look like they are here to stay, and with the Budget changes placing more focus on saving and investing, passive vehicles could be a key beneficiary.
Mr Johnson notes: “I think it will take time. There is a need for continued education and awareness of the utility of ETFs, and we spend a lot of time helping customers understand them, the role they can play and how to access them.
“ETFs will become a more prevalent vehicle for saving both across personal savings and workplace savings, and as that happens you’ll get a happy confluence of understanding and acceptance.”
Nyree Stewart is features editor at Investment Adviser
