“In terms of the ETF sector, Europe is where the US was five years ago: growth has the potential to be explosive,” says Scott Ebner, global head of sales at State Street Global Advisors.
The refrain is a common one: Europe, with its large retail investor market has long been considered ripe for the rapid growth that has seen assets under management in the US exchange traded sector double since 2008. There are, fund distributors say, many reasons to be hopeful that 2012 could be the year.
From next January, implementation of the Retail Distribution Review in the UK will bar financial advisers from taking commission from investment product providers. Instead advisers will charge upfront fees, which should ensure low ETF management fees are clear to end users. Similar moves are under way in the Netherlands, and European product distributors are already making adjustments.
“RDR is transforming the sector here,” says Andy Clark at HSBC Asset Management in London, who is responsible for ETF product launches in Europe. “Active strategies were the default before, but we’re seeing increasing demand from financial advisers for lower priced products.”
But the story is not so simple. In the UK, while some large money managers have already taken steps to offer customers access to ETFs, many small advisers do not have the capacity to execute intra-day trades, or accounting systems to recognise intra-day changes in the value of ETF securities.
“Rule changes are only half of the battle. Just because advisers won’t be able to take commissions from active managers any more, it doesn’t mean they will have to offer ETFs,” warns David Gardiner, head of sales for the Emea region at iShares, BlackRock’s ETF franchise.
Mr Gardiner estimates that only 40 per cent of the UK’s financial advisory businesses have made proactive moves to be RDR compliant ahead of the January 2013 deadline.
In Germany and France, potentially two of Europe’s largest markets, change is coming more slowly, if at all: for all the talk of a single European market, the regulation of retail investment remains stubbornly national.
ETF distributors may be partly to blame: there is no umbrella European body for the sector, nor any talk of forming one. That means pressure for change, such as for the RDR in UK, has come from regulators, or retail investors themselves.
“Until recently ETFs in Europe were seen as institutional products, and distributors had pre-existing relationships with institutional clients,” says Mr Gardiner. “There is probably scope for more co-operation between us, especially on educating investors, and supporting retail financial advisers so they can make ETFs part of their offering.”
While funds in the Asia-Pacific region are also thought to be dominated by institutional flows – in particular from private wealth managers in Singapore – the retail sector appears to be on the rise in Australia.
Self-managed funds account for roughly a third of Australia’s pension or superannuation industry, and one provider at least offered its customers the option to invest directly in ETFs as well as single name equities last year.
Just before Christmas the country’s regulators also paved the way for Australian bond ETFs, with the first products launching this week.
While retail investors may remain the prize, ETF distributors are also targeting institutional investors with new products. A large portion of last year’s US product launches, which reached a record 302 according to industry research firm XTF, were so-called “factor” ETFs. These “intelligent” funds select out of an index constituents that display particular characteristics, for example high volatility.
In Europe distributors have also launched fund-of-fund style ETFs, which allocate investor money between different ETFs and index funds, to gain exposure to global equities, bonds and commodities.
But some innovations have struggled to attract inflows: the flurry of “factor” ETFs were partly responsible for the record number of unsuccessful product launches in the US last year.
Institutional investors offer mixed reviews of the new products. “ETFs that allocate assets could be a great one stop shop for retail investors, but I don’t see the attraction for active managers like myself, who tend to see the asset allocation decision as a chance to add value,” says Stephen Doran, a portfolio manager in HSBC’s wealth management division in London.