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European ETFs on track to reach EUR1tn in AUM by 2020, says Morningstar

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Driven by regulatory changes, innovation and increasing preference for low-cost investment solutions, ETF adoption across Europe is set to accelerate and could hit the EUR1 trillion-mark by 2020, according to a Morningstar report.

Authored by Morningstar’s European passive funds research team, led by Hortense Bioy, the 2017 edition of ‘A Guided Tour of the European Marketplace’ presents an analysis of the ETF marketplace and insights into the issue of ETF selection.
 
Comprehensive profiles for each of Europe’s eight largest ETF providers – Amundi ETF, db X-trackers, iShares, Lyxor, Source, SPDR ETFs, UBS ETFs and Vanguard – are also included.
 
“The European ETF marketplace has seen tremendous growth in recent years, with expansion in the number of strategies on offer,” says Bioy. “Despite talk of consolidation, the number of providers and products is still rising. Strategic or ‘smart’ beta, environmental, social and governance (ESG) and thematic exposures are areas of focus for new product development, and as the product menu further broadens, so does complexity. This calls for renewed education efforts for professional and retail investors.
 
“Morningstar has long been a proponent of low-cost funds of all stripes – including index mutual funds and ETFs – as one of the most effective tools to drive success for investors. We welcome the growth of passive investing and will continue to expand our research efforts in this area to assist investors in their fund selection process.”
 
The report reveals that assets under management (AUM) in European-domiciled ETFs have doubled over the past five years to approximately EUR550 billion at the end of December 2016 and are now at par with the longer-established market for traditional index funds.
 
European retail investors meanwhile, have yet to fully embrace ETFs, but distribution channels are slowly opening. Incoming regulation like MiFID II should help. In the meantime, the growing popularity of robo-advisors has advanced the case for the use of ETFs by cost-wary retail investors.
 
The European ETF market also remains top heavy, with the three largest providers controlling about two thirds of total assets and BlackRock retaining its position as the dominant player with its iShares range.
 
The market share of fixed-income ETFs has increased in each of the past five years and now stands at over 24 per cent, up from 16 per cent in 2011. ETFs are also proving a handy tool to gain exposure to fixed income in an environment where the traditional channels to access the asset class have been severely constrained by post-crisis bank regulation.
 
Morningstar says that the shift from synthetic to physical replication continues, with assets in physically replicated exchange-traded products now representing 77 per cent of the market, up from 66 per cent three years ago.
 
Providers have also launched increasingly complex products, such as strategic or ‘smart’ beta ETFs, with AUM in strategic-beta ETFs quadrupling in four years, landing at EUR 43 billion as at the end of 2016, with the European ETF market has become a sweet spot for active fund managers looking to diversify their offerings, with strategic-beta offerings the favoured avenue.
 

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