Gary Buxton, Head of ETF EMEA at Invesco, discusses how the European ETF business has done over the past year and looks ahead to 2020…
What has driven the recent growth in Invesco’s European ETF business?
Our European ETF business had its best year in 2019 with over USD11 billion of net new assets to the middle of December, taking us to USD44 billion in AUM. We would attribute the success to recent fund launches and inflows to several core products, as well as the general trend towards ETFs in Europe where total assets are approaching the USD1 trillion mark.
We launched 20 products this year, including suites of US Treasury, euro government bond and UK gilt ETFs, an MSCI Kuwait ETF for investors who want to gain exposure ahead of its inclusion in the MSCI Emerging Markets index (pencilled for 2020) and our first ETFs with specific ESG considerations. One of the new ESG ETFs was developed in collaboration with both our Invesco Quantitative Solutions (IQS) and ESG teams, which is the first time we have harnessed the expertise of other parts of the business within the efficiency of our ETF structure.
What products have proven to be the most popular?
Products that have seen large inflows this year are our Invesco S&P 500 UCITS ETF, with more than USD2.7 billion of net new assets in the first 11 months, taking it to over USD8 billion AUM; Invesco US Treasury Bond 7-10 Year UCITS ETF, with more than USD2 billion added; PIMCO US Dollar Short Maturity Source UCITS ETF (+USD1.4 billion); and Invesco Physical Gold ETC (+USD1.2 billion). Additionally, our range of innovative income ETFs, which includes AT1 capital bonds and preferred shares ETFs, have had a strong year both in performance and asset growth terms as central banks became increasingly dovish during the year.
If we look at the whole of the European ETF market, the year can really be separated into two parts. The first eight months saw fixed income, gold and other more defensive areas of the market gather the most inflows, as investors were concerned about the global economy and impact of trade wars. Since then, there has been a shift in risk appetite, with equities gathering more flows while fixed income investors have also moved out into higher risk segments such as emerging market debt.
On a more ETF-centric level, we have seen a shift in demand for synthetically replicating products especially for tracking US equity indices such as the S&P 500 and MSCI USA. Synthetic products have seen huge inflows this year, while some physical versions have experienced large outflows. This is due to a structural performance advantage of the synthetic model that significantly reduces the impact of dividend withholding tax on these funds. To us, this suggests investors are becoming more agnostic when selecting ETFs, choosing whichever method and provider offers them the best outcome.
Who’s buying them? Institutional or retail?
We are seeing a much broader investor audience using ETFs now in Europe. Previously buyers were typically medium to fairly large investment banks, hedge funds and other asset managers, but this has since expanded to include larger IFAs, private banks and wealth managers. If you define institutional in the traditional sense, as large pension funds and insurance companies, then they too are beginning to use ETFs where the investment vehicles have grown to sufficient size. As funds continue to grow, we expect to see much greater demand from these top-end institutional investors.
An ETF has several benefits that should appeal to all investors, from the simplicity and transparency to typically lower costs than other investment types. A greater choice of strategy and objective across asset classes can also be an attraction for investors looking to either diversify their portfolio or replace existing holdings.
Is the UK’s wealth adviser audience taking up ETFs more willingly?
Yes, and the combination of all the factors just mentioned helps explain why. We have seen wealth managers and other advisers using ETFs much more for core exposures, to capture very specific areas of the market, to generate potentially better risk-adjusted returns or simply to bring down the overall portfolio costs. This has been helped not only by their own understanding of the structures but also, we would assume, by end-investors becoming more aware of and comfortable with them.
How is Invesco spreading the ETF story across Europe?
We are getting the message out in every way we can think of, because we genuinely believe in the value that ETFs offer investors everywhere. We have some of the most experienced people out in the field opening dialogues with investors, trying to understand their needs and where our ETFs can fit – or finding areas where we can develop products to meet needs not currently being met. We meet investors one-to-one, at roadshows and industry events. We have also increased our presence through digital channels, and we have embarked on several advertising campaigns over the past year to continue raising awareness.
What new products are on the starting block?
We have quite a wide range of ideas in various stages of development, each one really driven by investor demand. You could probably expect us to launch a few ETFs that fill one or two gaps in our product range, including simple exposures as well as other more innovative ones. These are likely to focus mainly on equity and fixed income asset classes. We will also continue working with investors and our ESG team to better understand, identify and develop a wider range of investor-driven ESG products.