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Beverly Chandler, GFM

ETF industry experiences strong growth despite fragmentation issues

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ETFs just continue on their upward trajectory in terms of asset raising over 2018, and many of the participants in this year’s ETF Express Awards Special Report are celebrating the huge and steady growth in the industry.

January’s figures for global ETFs and ETPs saw them gather net inflows of USD17.35 billion, implying an asset rise over the month of 7.13 per cent, according to ETF data providers ETFGI.

The combination of market moves and net inflows meant that by the end of December there was some USD5.16 trillion in global ETFs. 

Within Europe, the recent Greenwich Associates study of institutional investor use of ETFs showed that European institutions increased their allocations to ETFs by 50 per cent in 2018. ETFs now represent 15 per cent of total assets managed by the 127 institutional investors who took part in the Greenwich Associates 2018 study, up from 7.6 per cent in 2016.

Speaking at the ETF Express Awards lunch at The Reform Club in London on March 7th, Oliver Bradley, CEO of Global Fund Media, reflected on the first ETF Express awards which were held back in 2010, in Sketch in Mayfair. This year marks the ninth awards for ETF Express. At the time, the industry was recovering from what our report called ‘the dark days of 2008’.

ETFGI’s Deborah Fuhr was still at BlackRock in 2010 and confidently predicting that ETF assets could grow by up to 30 per cent in that year. At the time, global ETF industry assets stood at just over USD1 trillion, with 139 providers of ETPs and 4,918 listings on 43 exchanges.

This compares with January’s figures revealing the Global ETF/ETP industry had 7,680 ETFs/ETPs, from 408 providers listed on 71 exchanges in 57 countries. The figure that stands out is that increased list of providers in the intervening nine years, plus the growing globalisation of the ETF/ETP product.

Looking back to 2010, it had been 10 years since the first product launch in Europe but while the number of products didn’t differ that much between Europe and the US, assets did. Assets in ETFs in the US stood at USD678.6 billion, while in Europe, volumes were at USD220.1 billion.

Fragmentation of the industry in Europe was a problem back in 2010 and remains one today. Recently interviewed for ETF Express, James McManus, investment manager and Head of ETFs at digital wealth manager Nutmeg, commented on that very same fragmentation, which in his opinion, makes it hard for investors to understand liquidity dynamics.

“The revolution promised by MiFID II has not happened as yet. ETF providers need to ensure investors have access to the right data,” he says. 

Because of the fragmentation of ETF markets across Europe and multiple exchanges, he feels that it is hard for investors to discover the cost of transacting, which can differ for products of a similar underlying nature. 

“Investors can’t easily see the full extent of the picture,” he says. And the market in Europe has been heavily biased towards OTC trades which, despite the fact that trading data is now available, are hard to understand, or pick apart.

This problem is partially going to be resolved by MiFID II whose impact is referred to by a number of our special report participants. Since January last year, all ETF trading has to be published and the results demonstrate the liquidity and depth of the markets in ETFs across Europe.

In this report, Adriano Pace, head of equities, Europe for ETF trading platform Tradeweb describes MiFID II as ‘particularly beneficial for the ETF market’ as every single trade has had to be reported since 3rd January 2018.

“MiFID II has increased investor confidence in the depth of the ETF market,” Pace says. “It’s an important point because before you could only see the liquidity on exchange. It’s helped us because clients are more confident of executing large trades electronically.”

And there is greater depth in that trading as well. Another report participant, Josh Kulkin, global co-head of trading at Jane Street, reports that 2018 saw the largest single trade in the ETF market and Jane Street’s history, where an asset manager was able to transfer USD5 billion out of EFA (iShares MSCI EAFE ETF) into IEFA (iShares Core MSCI EAFE ETF). 

“The idea that a customer can do a USD10 billion notional transition from one international ETF into another in a single trade seemed out of the realm of possibility even three years ago” Kulkin says.

“It shows the evolution of liquidity provision in the ETF space and how we, and the community of firms like us, are growing in scale and size along with the ETF market,” he says. “This ability to efficiently transfer risk and switch large positions between two indices at a competitive level is incredibly compelling for end investors.”

Back in 2010, BlackRock’s ETF team believed that the Retail Distribution Review, which was designed to ban commission in the UK retail market, would also have a good effect on ETF asset growth in the retail sector.

However, few saw the limitations of the many platforms that UK wealth managers and financial advisers used whose infrastructure simply didn’t allow the trading of ETFs.

That situation is slowly changing, but the result has been that greater use of ETFs by institutions in the UK, motivated by liquidity, transparency and low fees in the ETF sector.

In terms of investment trends in ETFs, 2018 has seen a big swing to thematics, particularly any ETF with ESG, SRI or Impact pedigree. The Greenwich Associates’ report revealed that too, saying: “ESG is key: European institutions are integrating Environmental, Social and Governance (ESG) standards into their investment process, and many of these investors are using ETFs as their vehicle of choice for ESG exposures. Forty-four percent of study participants overall and half the investment managers are using ETFs as a main vehicle to address ESG.” 

And it’s a big market too. According to the recently published “ESG Data: Mainstream Consumption, Bigger Spending” report from Opimas, ESG investing is growing significantly globally, as the responsible investment market reached USD30 trillion in AUM in 2018.

This year, for the first time, we used a ‘sanity checker’ for our awards, and added in a few new awards. We would like to thank Allan Lane of Algo-Chain for his help with the awards’ voting process. 

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