Mark Wiedman, the global head of iShares, BlackRock’s exchange-traded funds platform, has predicted that the European exchange-traded product sector will exceed USD900bn in size by the end of 2017, as the use of ETPs spreads further across the continent and into new investor segments.
Wiedman (pictured) says: “It’s been a wild ride so far. In Europe, assets held in ETPs hit a new high of USD387bn at the start of this year. We’re predicting the European ETP category will more than double over the next five years to over USD900bn. Globally, ETPs have had a huge run over the last few years, going from USD700bn in assets globally at the start of 2009 to crossing the USD2trn milestone in January 2013.”
iShares sees five significant trends driving the growth of European ETPs.
1. Changing distribution dynamics: Changes in the way financial products are distributed are accelerating the uptake of ETPs by retail investors. European financial advisers are increasingly adopting a fee-based advisory model, which tends to favour low-cost and efficient products such as ETPs. This change has been driven by regulation in the UK, Netherlands and Switzerland and by broader market forces in Germany and Italy.
2. Greater development and use of wraps: Providers are starting to create more asset allocation products and structured wraps based on ETPs. These enable financial advisers to access ETPs in the same way they access some mutual funds and make holding them much more convenient for European retail investors.
3. Increased use of ETPs by institutional clients: Institutional asset managers are using ETPs more and more to implement investment decisions in active, passive and blended portfolios. Recent analysis by iShares suggests that the amount of ETPs held by some of the largest global asset managers has recently increased by over 30% per year.
4. A revolution in fixed income products: Fixed income products have become deeply illiquid since 2007 and bid/ask spreads for fixed income trades have reached unprecedented levels, particularly for large orders. Trading fixed income ETPs on-exchange can now be cheaper than trading the underlying bonds. Fixed income ETPs are relatively new in Europe but interest is increasing and iShares believes this will continue as investor awareness grows.
5. Improvements to market infrastructure: Many initiatives are underway to improve market infrastructure, which will make the trading of ETPs more efficient and boost their attractiveness. These include efforts to connect liquidity across fragmented European trading venues, allowing access to best prices and improving the provision and transparency of ETP industry data.
Wiedman says: “The growth of the ETP industry has much further to go. Compared to the market size of other investment vehicles, in segments such as securities, mutual funds and derivatives, ETPs have huge headroom for growth, even in the more mature markets of Europe and the US It’s a very exciting time for investors and providers alike.
“The European ETP category has traditionally been considered as the ‘younger sibling’ to the US market, but not for much longer. European investors are starting to see ETPs as mainstream investment vehicles, particularly as some of the structural limitations that have traditionally made them less accessible to investors are being resolved.”