Bank of New York Mellon : What’s in store for European ETFs?

Written by: Rob Rushe | European ETF Segment Executive, BNY Mellon

This week in London is the annual Inside ETFs Europe, the largest exchange traded funds conference in Europe, at which BNY Mellon once again has a significant presence.

It has been a busy 12 months for European ETFs since last year's conference. Despite a slower rate of growth in 2018 for assets under management compared to the previous few years, we are seeing a sharp increase in interest in launching new fund ranges, especially from US asset managers and some large UK asset managers who had until recently kept a 'watching brief' for ETFs. Based on the conversations we are having, this is likely to add up to a significant number of new entrants to the European ETF market in the first half of 2019.

Some of these new entrants will be facilitated by HANetf, Europe's first independent white-label ETF platform, which is due to be launched at the Inside ETFs Europe conference, and for which BNY Mellon provides custody, administration and trustee services. While there is strong interest from US fund houses in bringing their ETF funds and expertise to the European market, the traffic is not all one way. Some European managers are now launching US domiciled ETFs, despite the high branding and distribution barriers that European investment managers traditionally face in that market.

These new market entrants and fund launches are making it increasingly hard to find people with the right level of experience and expertise. Faced with this squeeze on ETF talent, asset managers are frequently turning to service providers such as BNY Mellon for the knowledge, guidance and support they require.

Fee compression has continued for ETFs over the last year, culminating in the launch of the first zero-expense ratio funds in August. No or very low fees ETFs are likely to become the norm, at least for core ETF products covering large cap indexes. While new launches with smart beta strategies will be able to maintain a premium over these rates, the general direction for ETF fees is clearly downwards.

ETFs are not limited to index tracking and smart beta strategies. However, some active managers may feel that they were dealt a blow last month by the Central Bank of Ireland, which confirmed that it would retain the requirement for daily portfolio disclosure for ETFs. Daily portfolio disclosure is a barrier to the development of actively managed ETFs because asset managers are reluctant to reveal details of their portfolio holdings in case their investment strategies are copied by competitors. With the vast majority of European ETFs now domiciled in Ireland, this might be considered a major setback for managers considering launching active ETFs. It may not turn out to be the case, however. The announcement at least provides clarity and some active managers who had been waiting for the Irish regulator's decision before bringing active ETF funds to the market may decide to so now they know the rules under which they are to operate.

Finally, a trend we can see accelerating is the consolidation of trading exchanges for ETFs. With 23 exchanges currently across Europe, there are a number of competitors looking to be the one-stop shop for ETFs.

All in all, there is plenty for everyone to discuss at Inside ETFs Europe conference. The next 12 months look set to be as interesting as the last for ETFs in Europe.

The views expressed herein are those of the author only and may not reflect the views of BNY Mellon.