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Cerulli Associates: Europe’s ETF industry players need to adjust to challenging times   

A difficult 2022 so far and slow growth forecasts mean managers operating in Europe’s ETF industry will need to prioritise strategic activities, according to the latest Cerulli Edge—Global Edition.

Robust growth over the past decade saw the assets under management (AUM) of ETF products in Europe surpass the USD1 trillion mark in 2021. However, the firm writes that the ETF market, along with much of the rest of the finance industry, is now struggling with rising inflation, central bank rate hikes, and fears of recession. By the end of 1H 2022, the AUM of ETFs in Europe had contracted, according to data from Morningstar. 

“Our research indicates that managers will focus on strategies such as expanding into new country markets, M&A opportunities, or liquidating certain funds. Partnerships will remain a key element of reaching and appealing to investors,” says Fabrizio Zumbo, director, European asset and wealth management research at Cerulli, a global research and consulting firm.

Some 37 per cent of the respondents to Cerulli’s ETF survey plan to enter or expand their efforts in new country markets. A similar number will look to M&A to enhance their product and distribution capacity. Nearly a third (31 per cent) of respondents expect to continue cutting fees and 29 per cent intend to review their product suite with a view to liquidating or merging funds, if warranted.

Sixty-three per cent of the ETF issuers Cerulli surveyed expect to collaborate with new partners such as index providers and ESG specialists over the next 12 to 24 months. More than half (54 per cent) expect to build partnerships with local distributors. On average, third-party distribution accounts for 61 per cent of the ETF products distributed across the seven European markets Cerulli researched and in-house distribution accounts for 39 per cent.

Industry players are likely to concentrate on markets in Europe where ETF adoption is increasing. For example, 40 per cent of the ETF issuers Cerulli surveyed across the region expect to focus their sales efforts on the German market, 20 per cent expect to focus on the Italian market, and 14 per cent expect to focus on the UK market. 

Forecasts of thematic ETF growth over the next 12 to 24 months are mixed. Fifty-five per cent of the ETF issuers Cerulli surveyed expect slow (1 per cent to 5 per cent) to no growth of thematic ETF AUM; 43 per cent expect asset growth to be at least moderate (6 per cent to 10 per cent). Cerulli expects thematic ETFs to continue to fare well in cases where managers can tell a long-term story to clients, looking beyond the short-term noise in markets. Many of the megatrends in play, such as the aging population, robotics, and clean energy, will affect global economies on a multi-decade timeline. 

Cerulli research indicates that ETF issuers in the US believe active versions of products offer more opportunities than strategic beta or passive ETFs, yet many firms have adopted a wait-and-see approach to product development, monitoring what their competitors are doing.

Cerulli cautions against delaying. For example, thematic exposure via active ETFs offers opportunities that are too good to be ignored, the firm says.

Product innovation is creating investment opportunities and increasing customer choice in the ETF market in Asia ex-Japan. Cerulli’s survey found that 83 per cent of manager respondents in China, 67 per cent in Korea, and 60 per cent in India are in the process of developing ETF products.

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