The European exchange-traded funds industry — predominantly an institutional investor business in the region — is developing at a fast pace, as the pandemic and interest in ESG-specific products in particular accelerate interest.
In stark contrast to the U.S., institutional investment in ETFs outstrips retail interest in Europe. Sources estimate the institutional-retail split for the $1.37 trillion European ETFs market to be about 80-20.
But rather than simply investing in ETF products developed by providers, "in recent years we've seen many partnerships between ETF issuers and institutional clients with new launches seeded with multiple hundreds of millions of dollars," Matthew Tagliani, London-based head of ETF product and sales strategy for Europe, the Middle East and Africa at Invesco Ltd., said in an email. The firm has more than $53 billion in ETF AUM in Europe.
Two such institutional investors can be found in Finland — and they're both focusing on environmental, social and governance ETFs.
The most recent investment was by Varma Mutual Insurance Pension Co., Helsinki, which was an anchor investor in BlackRock Inc.'s U.S. Carbon Transition Readiness ETF, launched April 8. Varma invested €200 million ($240 million) in the sustainable ETF.
The €52.9 billion fund has not only been the anchor investor on new offerings, but in 2019 created its first ESG ETF.
It helped to create a responsible investment-focused European equities ETF with Legal & General Investment Management Ltd. and investment services provider Foxberry Ltd., investing €200 million. The L&G Europe Equity (Responsible Exclusions) ETF was listed on the London Stock Exchange in September. Later in 2019, Varma worked with the same two firms to create a responsible invest-ment-focused U.S. equities ETF, investing €500 million in the L&G U.S. Equity (Responsible Exclusions) UCITS ETF.
Varma's total exposure to ETFs amounts to "a meaningful number," Timo Sallinen, head of listed securities, said in an email. He did not give an exact figure.
Mr. Sallinen added that ETFs are a "very flexible way to take exposure and reduce it," and that executives will continue to invest in the products in the future. "Seeding new ESG ETFs are possible," he added.
And fellow Helsinki-based fund Ilmarinen Mutual Pension Insurance Co. had €5.2 billion invested in equity ETFs — 9.7% of total assets and 27% of its equity exposure, Juha Venalainen, senior portfolio manager, cross asset allocation, said in an email.
The fund has used ETFs for years, but in 2018 began a process of aligning its passive portfolio with its ESG objectives.
"The indirect exposure from broad-index ETFs to controversial industries and companies" led executives to "think about the ways of filtering our passive exposure," Mr. Venalainen said. It asked providers to create ESG ETFs based on the MSCI ESG Leaders indexes and now more than 90% of its ETFs exposure is invested in ESG products.
Ilmarinen's latest venture saw it invest €500 million in the Amundi MSCI Emerging ESG Leaders UCITS ETF, listed on Germany's Xetra trading venue in June. The ETF marked the fifth listed index fund that invests in an ESG index that was co-developed by Ilmarinen, the fund said in a news release at the time.
"ETFs are excellent products to diversify equity exposure cheaply and transparently to chosen markets, sectors or themes," Mr. Venalainen added.