European exchange-traded fund assets have more than doubled over the last five years, reaching EUR362 billion as at 30 September 2014, according to a report by Morningstar.
The European ETF market remains highly concentrated, with the top three providers managing more than two thirds of the assets.
The need for innovation and product differentiation has increased; strategic beta, also known as ‘smart beta’, has become the new battleground for providers, while more investors are using the ETF vehicle strategically, specifically as core portfolio building blocks, and providers are cutting fees and launching low-cost ‘core’ ETF ranges.
ETF portfolio management is a highly automated process, using sophisticated technology solutions for day-to-day portfolio-building and risk-management tasks, though there is still room for skilled human intervention. ETF providers are meeting concerns about counterparty risk in ETFs by adapting practices, such as switching from synthetic to physical replication methods and capping or, in some cases, stopping securities lending activity altogether.
Hortense Bioy, Morningstar’s director of European passive strategies research, says: “The European ETF marketplace has clearly entered a new phase in its development. Over the past two years, we have seen an evolution in ETF usage, increasing competition, and heightened product differentiation. Regulation has spurred much of this change, as new types of investors are adopting the vehicle. Our report details how ETF providers are responding to this evolving landscape, and also aims to shed light on their portfolio management practices. We hope our work will assist investors in their ETF provider selection process.”
The report, A Guided Tour of the European ETF Marketplace, provides reviews of Europe’s 10 largest UCITS ETF providers: iShares, db X-trackers, Lyxor, UBS, Source, Amundi, Vanguard, State Street, Deka, and ComStage.