European investors are upping their use of exchange-traded funds, ETF providers say, as liquidity concerns, the need to be nimble in uncertain markets and regulatory demands on the derivatives market begin to take hold.
Sources suggest uptake is being driven by two segments of the institutional market in particular: money management firms in general, and, more specifically, in outsourced chief investment officer strategies. The vehicles have struggled to gain a foothold among Europe's institutional investors, and executives at consultants and pension funds say while they have seen pockets of increased use, a wholesale shift has not yet been witnessed.
As of the end of February, European ETF assets under management totaled $584 billion, an increase of 7.7% from the end of 2016 and 19.7% compared with the end of 2015, according to research and consultancy firm ETFGI. The firm found 881 institutions in Europe reported owning at least one ETF or exchange-traded product in 2015.
As of the end of February, European ETF assets under management totaled $584 billion, an increase of 7.7% from the end of 2016 and 19.7% compared with the end of 2015, according to research and consultancy firm ETFGI. The firm found 881 institutions in Europe reported owning at least one ETF or exchange-traded product in 2015, up from 875 a year previous.
“In institutional segments, it has been a difficult market — I've been in the industry many years and it is a difficult sell in ETFs,” said Andreas Zingg, Zurich-based head of exchange-traded fund distribution management for continental Europe at Vanguard Group. The issue traditionally has been ETFs' higher expense ratios compared to the institutional share classes of index funds, he said, although that is now changing as investors also look at trading costs, tax costs and the overall fees they are paying for investment strategies. He noted it is also changing as ETF expense ratios come down in core products, making them increasingly competitive with index funds.
While costs vary, the weighted average expense ratio for ETF strategies in Europe is 31 basis points, according to a Deloitte publication in January. It said a number of ETFs have expense ratios of less than 10 basis points.
Mr. Zingg said while ETF usage among European institutional investors is increasing, it is a smaller asset pool, growing at a maximum 2% to 3% per year. That compares with his estimates in the private client space, where growth is about 7% to 8% annually.