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Stephen Cohen, BlackRock

As European ETFs turn 20, iShares boss says it’s time to move on from passive-vs-active debate


The head of EMEA for iShares, Stephen Cohen (pictured) has commented on the twentieth anniversary since iShares launched its first ETFs in Europe, examining the rise of ETFs from niche to portfolio mainstay and answering the most popular questions he regularly receives.

Who is winning the active-versus-index debate?

This is a popular one, but it’s time to move on. While pitting one against the other makes for dramatic headlines, it falsely assumes that investors must choose. The word ‘passive’, which is often used interchangeably with index investing, conjures a lethargy that doesn’t reflect the many ways investors use ETFs and index funds to take control of their investment outcomes. ETFs are becoming an integral tool to implement active decisions in portfolios by all types of investors, including alpha managers who are now among the fastest-growing users of ETFs.

There’s been a long-running suspicion that ETFs would not weather bouts of market turbulence without cracks showing – are the critics right?

ETFs have passed yet another test in the last few weeks. Amidst the greatest market volatility we have seen since 2008, the products performed exactly as they are designed to. In fixed income in particular, as underlying bond markets got more volatile and harder to trade, investors turned to ETFs to rebalance holdings, hedge portfolios and manage risk. Buyers and sellers were able to transact through the secondary market of ETFs at real-time prices, accessing liquidity when they needed it most. Looking back over the last 20 years, every time we have experienced market volatility, the number of new ETF users has risen – and once they start, they generally don’t stop. I believe the experience during this crisis will accelerate ETF adoption around the world.

The 2018 MiFID II regulation was touted as the big game changer for European ETFs, has it been the shot in the arm expected for the industry? 

MiFID II shined a completely new spotlight on cost and trading. It has without a doubt catalysed a drive for cost-efficiency within portfolios, which is ultimately going to benefit ETFs, just as we have seen in the US. Equally, ETF trade reporting was not mandatory prior to the arrival of MiFID II, and the illumination of trading volumes has exceeded expectations. European investors can now see the real volumes and liquidity available to them in the ETF market which is attracting new users both within Europe and from Asia and Latin America. Change doesn’t happen overnight, but MiFID has certainly laid the groundwork for future growth.  

How much bigger can index funds and ETFs get? 

If there is a limit, I believe we are far from it. There are USD5 trillion in ETFs globally, and over USD800 billion in European ETFs, not to mention index funds. These numbers may go up and down in the current market volatility but the long-term trajectory is unchanged. For context, ETFs still account for only a small share of the markets: 10 per cent of total equity assets, and below 2 per cent for bonds.

What do the next two decades hold in store for asset management and ETFs?

I expect ETFs to continue revolutionising more sectors and breaking new boundaries over the next two decades. Asset management is going through a structural shift driven by regulation and technology. A new focus on the true sources of returns will shift the industry from traditional security selection toward a whole-portfolio, outcome-oriented approach, where indexing and ETFs take centre-stage. Developments in fixed income, factors and the seismic shift to sustainable investing will drive the next leg of ETF and index fund growth in the region.

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