European ETFs to Reach $500 Billion

Terry Flanagan

Assets in European exchange-traded funds and products are expected to break through the $500bn barrier this year after gathering record net new assets in 2014.

Last year the ETF/ETP industry in Europe had a record $62bn in net new inflows taking total assets by the end of December to $460bn. Consultancy ETFGI said in a statement it expects the European industry to break through the $500bn milestone in this year.

Deborah Fuhr, managing partner of ETFGI, said in a statement: “The record level of $62bn of net new assets gathered by ETFs/ETPs in Europe in 2014 demonstrates that ETFs have become a preferred tool for many types of investors to implement and adjust their asset allocation.”

In Europe the largest three ETF providers were BlackRock’s iShares, Deutsche Bank’s db x/db ETC and Lyxor AM, owned by France’s Societe Generale, with the three having an aggregate market share of 68.2%. However iShares’ portion fell from 48.1% to 46.2% between 2013 and 2014 said ETFGI. Shares for db x/db ETC moved from 12.1% to 12% and Lyxor AM’s share was also flat as it fell from 10.5% to 10%

Tradeweb said that overall traded volume on its electronic platform for European-listed ETFs increased almost threefold between 2013 and 2014 due to more interest in fixed income products.Trading in fixed income ETFs on Tradeweb rose 3% to 30%, while in contrast equity and commodity ETF trading volumes fell by 2% and 1% respectively.

BlackRock said in its Global ETP Landscape for 2014 that fixed income was the greatest contributor to flows with $25.5bn, led by $10bn into investment grade corporate debt. The fund manager said ETPs in Europe gathered $60.8bn in 2014, three times more than in 2013 and second only to record of $69.5bn in 2008.

“ETP adoption has accelerated following three years of low growth as the European economy struggled in the wake of the financial crisis,” added BlackRock.

The report said the European market is maturing rapidly as competition increases, financial advisors move to fee-based models and there efforts are launched to make it easier to trade products across national borders.

Last June, BATS Chi-X Europe listed its first exchange- traded fund ETF and this had an international securities structure pioneered by Euroclear Bank, the international central securities depositary, which aims to reduce ETF trading costs in Europe.

In Europe the the same ETF can be listed on a number of national stock exchanges and has to be settled locally in the national central securities depository of the exchange where the trade is executed. As a result it is difficult and expensive to trade same ETF across borders i.e buy an ETF listed on one national exchange and sells it a on a different country’s exchange.

Market participants need to have accounts with multiple national central securities depositories in order to move ETFs between countries, reconcile their positions and to follow different post-trade market practices in different markets. There is an increased potential for settlement failures, fines, counterparty compensation claims and ETF buy-ins to avoid settlement fails leading to ETFs in Europe trading at much wider spreads than in the US.

In September BATS Chi-X Europe also announced a new trade reporting platform as between 70-80% of ETFs listed in Europe are traded over-the-counter and most of this volume is not reported.

BlackRock said themes to watch in 2015 include smart beta, emerging markets and Japan equities.

Assets for smart beta equity, which track tailored exposures rather than the standard market-weighted indices, have quadrupled since 2008.

“Organic growth for smart beta is 18%, twice that of market-cap weighted equity ETPs,” added Blackrock. “The biggest contributors to this growth have been dividend-focused and minimum volatility funds.”

Investing in stocks which pay larger dividends is attractive in a low-rate environment but as rates are forecast to increase, volatility is also expected to rise in 2015.

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