Assets held in European-listed ETFs sky-rocketed last year, jumping some 40% as the popularity of these investment vehicles continues to soar, according to annual data from provider ETFGI.
Some $802bn was invested in ETFs at the end of 2017, according to preliminary figures from the provider, a 40% increased year-on-year and the strongest growth the sector has seen since 2009.
However, European-listed ETFs remain a small part of the assets invested in these vehicles globally, which total some $4.8trn as of the end of 2017, and experts believe the European market is only just beginning to catch up with the likes of the US, where exchange-traded products have been popular with investors for far longer.
The US remains the largest ETF market to date, housing some $3.4trn worth of assets, but its growth rate continues, with a 34% jump in assets last year. However, the region that saw the strongest growth was Japan, where assets held in these vehicles jumped some 60% in 2017.
Exchange-traded vehicles have been attracting new money as many active managers have disappointed with underperformance, as questions arise about whether paying for an active fund is worth the potential extra returns. A number of surveys published last year, including the Asset Management Market Study issued by the UK’s financial regulation, the Financial Conduct Authority (FCA), have pointed to the superiority of passive products over active funds in many instances, suggesting investors may be better off switching into passive offerings to maximise returns.
As the popularity of the field grows, many fund groups are keen to get a slice of the pie, and some 40 providers launched their first ETF offerings in 2017, according to the Financial Times, including large players such as JP Morgan Asset Management, which came out with its first European ETF range last year.
But the behemoth players such as BlackRock (with its iShares range), Vanguard and State Street Global Advisors continue to dominate the global market. Last year, iShares took in some $246bn in inflows, up from $140bn the previous year and a record for the firm. It’s European ETF range attracted some $41bn in new money from investors.
Experts, including head of EMEA iShares Stephen Cohen, believe the introduction of the MiFID II rules earlier this month will drive further growth in the European ETF market.
Speaking to the Financial Times, Cohen said “we are just starting the journey the US has seen over the last five years or so”, suggesting Europe has a lot further to go to catch up.
According to ratings agency Moody’s, the introduction of the regulation will drive further use of ETFs in securities lending and collateral purposes in particular, as the new rules make more information readily available with regards to trading volumes and liquidity.
The new EU-wide rules require all ETF trades to be reported, unlikely previously, when most transactions took place over-the-counter (OTC) and therefore did not reflect the true trading volumes and liquidity of these instruments.
According to Moody’s, the use of ETFs as collateral in securities lending by European institutional investors has been constrained by a perception of low liquidity thus far.
BlackRock has already noticed an increase in the use of ETFs by institutional investors in financial transactions alongside such instruments as bonds and derivatives, and predicts the size of the ETFs market will more than double by 2022.