MiFID II To Boost European ETFs

Shanny Basar

New regulations in the European Union next year are expected to boost exchange-traded funds in the region after inflows in the first nine months of this year have been more than the total in 2016.

MiFID II, which comes into force in January 2018, will introduce new pre and post-trade transparency requirements for ETFs in Europe.

Hector McNeil, HANetf

Hector McNeil, former co-chief executive of issuer WisdomTree Europe, said on a panel at the Thomson Reuters Lipper Alpha Forum in London today: “MiFID II is the latest injection of steroids into the European ETF market and we will see millions move from US to Europe.”

Assets under management in ETFs/ETPs listed in Europe increased by 31.2% in the first nine months of this year to reach a record of $751bn according to ETFGI, an independent research and consultancy firm. Inflows in the first three quarters were a record $85.7bn, more than the $55.7bn gathered in the whole of 2016.

Jason Xavier, head of EMEA capital markets at Franklin Templeton, said on the panel that MiFID II will have a long-term impact on the European market. He said: “In Europe 70% of ETF volume is from institutions and 30% from retail, which is the opposite of the US market. That will eventually change to 50/50 in Europe.”

Franklin Templeton is an experienced US active manager but has entered the ETF market.

Xavier added: “We still believe in active management but wanted to give investors the choice to use that expertise in an ET wrapper. We have launched ETFs in three markets in the past 18 months – US, Canada and Europe.”

In September Franklin Templeton launched its first range of smart beta ETFs in Europe which were listed on Deutsche Börse and the London Stock Exchange. Smart beta ETFs do not track indexes just based on market capitalisation but instead track indexes based on other characteristics such as dividends or low volatility.

McNeil expects all active strategies,  except illiquid assets such as real estate and private equity, to become available in an ETF structure. “I believe the largest pool of assets in ETFs will eventually be in active,” he said.

Since leaving WisdomTree Europe, McNeil has become co-chief executive and founder of HANetf which provides services to asset managers entering the European ETF market, which has different tax regimes and languages in each national market.

“The hardest part of successfully launching an ETF is to gain assets,” added McNeil. “Managers will continue to own their intellectual property and assets but we will provide a full service on top of their production, including distribution.”

McNeil continued that HANetf is in discussions with a number of large asset managers. “There is huge pressure on managers to enter the ETF market and all our discussions are regarding  thematic, smart beta or active ETFs,” he added.

Detlef Glow, head of EMEA research at date provider Thomson Reuter Lipper, said at the conference today that J.P. Morgan in the only firm amongst the top five promoters in Europe not to have entered the ETF market. However, over the  summer J.P.  Morgan said it is going to launch a suite of ETFs based on hedge fund strategies in Europe later this year.

Glow said in a note this week that ETFs have been a success story in Europe over the past 15 years and the market does not yet seem to be oversaturated. Instead, new players have entered the market, despite high competition, although not all of them may be profitable.

‘There is a sweet spot (the “smart beta segment”) where the competition is not that high and the pressure on management fees is quite low,” added Glow. “Fund promoters can differentiate themselves there by using particular factors or by the way they structure the underlying indices for their ETFs.”

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