European ETFs To Overtake Mutual Funds In 15 Yrs

Shanny Basar

Mutual funds will become legacy products within 15 years due to the growth of assets in exchange-traded funds in Europe according to Hector McNeil, co-chief executive and founder of HANetf.

McNeil told Markets Media: “ETFs are simply better technology. The Amazon Prime generation are not going to send forms to platforms and wait weeks for prices.”

He said the 15% market share for passive strategies in Europe could be more than 35% in five to 10 years.

Hector McNeil, HanETF

“Crucially, if you look at the numbers now, in the US the majority of new money already goes into ETFs, and Europe is following suit,” he added. “If this continues – and we think it will – mutual funds could well find themselves consigned to the ‘legacy’ bucket within 15 years.”

He continued that European ETF assets have risen by 33% this year, beating the US growth rate of 18% for the first time.

EY has also predicted that assets under management in passive funds will be larger than active funds by 2027 in its fifth annual study of global ETFs released last month. The study, Reshaping around the investor: Global ETF Research 2017, predicted ETF asset growth of approximately 15% per annum for the next three to five years, up from $4.4 trillion at the end of September 2017.

“If anything, we think this understates the industry’s growth potential,” added EY. “We believe global ETF assets could reach $7.6 trillion by the end of 2020 — equivalent to a compound annual growth rate of of approximately 18% (13%-14% of which will come from net new inflows) — underpinned by the shift to passive, the size of ETFs relative to the overall market and ETFs’ suitability for digital distribution.”

In the EY study two-thirds of respondents believe most managers will have an ETF offering in the next five years.

Roger-Marc Noirot, chief operating officer – passive asset management, Deutsche Asset Management, said in the EY report: “ETFs will increasingly be the main input into the assembly line of asset managers and allocators. They allow the chassis to be built, freeing up time and resources for managers to concentrate on alpha sourcing.”

McNeil said growth in Europe will come from smart beta products, where ETFs do not track standard market cap-weighted indexes, but instead use indexes weighted towards factors such as low volatility or dividend yield; ESG funds and thematic offerings e.g related to blockchain or self-driving cars. He expects all active strategies, except illiquid assets such as real estate and private equity, to become available in an ETF structure.

The EY report said there will be increased margin pressure in as more managers enter the ETF market, which creates valuable opportunities for service providers that can support the detailed regulatory, reporting and risk management requirements of ETFs.

White label providers will also offer an increasingly popular way for new entrants to overcome barriers to entry. “They can help with regulatory approval, seed capital, product development and listings, and provide introductions to market makers, authorized participants and other liquidity providers,” added EY.

Nik Bienkowski, HANetf

McNeil and Nik Bienkowski have launched HANetf  as Europe’s first independent third-party provider of services for asset managers who want to enter the  European ETF market, which has different tax regimes and languages in each national market. The business recently completed a seed funding round including investors such as Peter Thompson, co-founder of Source ETF, and Point72 Ventures, the early-stage venture capital strategy funded by Steve Cohen.

Bienkowski and McNeil previously founded ETF Securities and then Boost ETP, which was acquired by US-based WisdomTree Investments in 2014 to launch WisdomTree Europe. Last month WisdomTree Investments said it has agreed to  acquire ETF Securities’ European exchange-traded commodity, currency and short-and-leveraged business, which includes $17.6bn of assets under management.

McNeil said: “The next wave of managers will launch between between one and five funds and we can crush barriers to entry by providing services such as operations, compliance and capital markets.”

He continued that HANetf is in discussions with more than 60 asset managers who want to enter the European ETF market, mainly from the US but also from Asia. In addition to launching ETFs for European investors, some managers are looking to launch UCITs ETFs for their Asian and Latin American clients.


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