Forthcoming European Union regulation in the guise of the new Markets in Financial Instruments Directive (MiFID II) will boost Europe's exchange-traded funds (ETFs) markets.
That’s according to research and consulting firm Cerulli Associates, which cites fragmentation and the dominance of banks and tied-agents' networks in countries such as Italy, France and Spain as key inhibitors to ETFs gaining further ground on the continent.
"Distribution of financial products in southern Europe is firmly in the hands of banks and tied-agents' networks – intermediaries with little interest in promoting ETFs. The ban on commissions for independent financial advisers, which is due to be introduced by MiFID II in 2018, is likely to encourage them to make greater use of ETFs," says Barbara Wall, Europe managing director at Cerulli.
Cerulli does not expect ETF prices to fall, in the short term at least, in line with a growth in popularity, as was the case in the US.
"In the US, low prices drew in investors and economies of scale, in turn, compressed fees further, attracting more investors, thereby establishing a virtuous circle. One of the reasons Europe has not followed suit, is that operating on the continent involves dealing with different regulators in different languages and through various marketing strategies. In other words, inflows may be on the rise but distribution among more than 20 exchanges and sometimes in multiple exchanges inevitably entails more expenses," says Wall.
Cerulli says doubts have been raised as to how liquid ETFs can be in Europe, given that most ETF trades are not reported.
"It's a valid point, but MiFID II will require ETFs to report their trades. This is expected to result in more transparency on trade volumes and pricing dynamics and to bring more trades on exchange, thereby improving liquidity," says Wall.
Fixed income and commodity products are providing opportunities for ETFs. "There could be growth potential for fixed income across the whole range: developed and emerging sovereign debt, as well as high-yield and high-quality corporate debt," says Wall, adding that smart beta ETF products will gain in popularity among protection-seeking investors averse to paying over the odds.
