- Concentration of assets in the European ETF market is nearing that of the US, raising questions from both investors and regulator
- Lack of competition in European ETF market is damaging to the long-term success of investors, the long-term business opportunity for asset managers and the long-term health of the ETF industry
- High barriers to entry and perceived competitive challenges are inhibiting market entry and preventing the introduction of new offerings by prospective ETF issuers
- Barriers to entry into the European ETF market are lowering as Europe adapts and evolves the white-label model
Exchange Traded Funds (ETFs) have been one of the most revolutionary and disruptive investment propositions of our generation. Since their launch in Europe in 2003, ETFs have seen assets grow to -$1 Trillion  and an increasing number of asset classes, exposures and strategies are now available to investors in the simple and cost-efficient ETF format.
ETFs are ‘democratic’ products – both retail and institutional investors trade the same product in the same way with the same availability of information. The unique structure of ETFs (which connects the investor directly to the underlying asset class through the “create/redeem” mechanism) means that an ETF can absorb both very small and very large trades without impacting the market. A boon for investors, ETFs have levelled the playing field and enabled investors to reach previously inaccessible themes and asset classes.
Though ETFs may have democratised the investment landscape, the European ETF industry itself is trending towards oligopoly (control by the few). A vast concentration of assets in the largest European ETF providers, coupled with structural impediments and opaque influence networks are inhibiting innovation, raising barriers to entry and reducing consumer choice. In order for the European ETF industry to reach its full potential, the barriers to entry and the impediments to success must be addressed.
What Are the Barriers to Entry in European ETFs?
The ETF model has been proven to work. Asset managers, banks and insurance companies are now looking at ETFs as a serious strategic opportunity that will enable them to grow and meet the needs of modern investors. ETFs are understood as a disruptive distribution technology that is applicable to asset managers of all shapes and sizes – not just traditional index fund managers.
Currently, almost every major ETF provider in Europe is linked to a broader financial institution and there is a good reason. It is expensive, difficult and time consuming to start an ETF business, especially if you are not experienced in the nuances of the market. Before a prospective issuer has even raised the first Pound/ Euro in seed they will need to invest heavily in:
- Office space and infrastructure
- Legal fees
- Talent acquisition and training
- Index licenses
- UCITS platform development
- Registration and passporting
- Custodian and sub-custodian fees
- Listing and exchange fees
- Paid market making
- Product development
- Marketing, branding and PR
These costs alone could reach €1-5 Million or more before the first ETF is even available to trade. On top of these essentials, a prospective issuer will need to understand the different regulatory environments across Europe, establish relationships with distributors and brokerage platforms and create a network of Authorised Participants (APs) and market makers to support the liquidity of their funds.
Large financial institutions with deep pockets can afford the cost, time and commitment to develop and launch their own ETF range in-house – we have seen juggernauts like JP Morgan, Goldman Sachs, Fidelity and Franklin Templeton launch in Europe with standalone offerings; but mid-tier and smaller asset managers frequently lack the resources and expertise for a DIY approach.
An alternative route to market entry would be to buy a footprint in the ETF industry by purchasing an existing ETF issuer. Legal & General took this approach by acquiring the ETF Securities Canvas platform in 2018. Of course, acquisitions are not frequently available, come with significant integration challenges and can be even more expensive than building in house, depending on the acquisition target. This option would only be available to large institutions and is not a feasible market entry strategy for most companies.
An Oligarchic Market
The 10 largest ETFs in Europe account for 16.7% of total assets, equivalent to $163 Billion.
|LARGEST ETFS: EUROPE||AUM $m|
|iShares Core S&P 500 UCITS ETF||37,075|
|Vanguard S&P 500 UCITS ETF||25,590|
|iShares Core MSCI World UCITS ETF||23,561|
|iShares Core € Corp Bond UCITS ETF||14,708|
|iShares Core MSCI EM IMI UCITS ETF||14,384|
|iShares Core FTSE 100 UCITS ETF||11,079|
|iShares S&P 500 UCITS ETF||10,435|
|iShares JPM EM Local Gvmt Bond UCITS ETF||9,608|
|iShares JPM $ EM Bond UCITS ETF||8,986|
|iShares € High Yield Corp Bond UCITS ETF||8,384|
|% of Total European ETF Assets||16.7%|
Source: ETFGI: Data as of January, 2020
There are now approximately 440 providers of ETFs in the world, but only 58 of them are in Europe. The distribution of European ETF assets by issuer highly concentrated with the top 3 providers controlling 63% of total assets:
|ISSUER||EUROPE: MARKET SHARE|
|Xtrackers / DWS||11%|
Source: ETFGI: Data as of Jan, 2020
Should this top-heaviness be a cause for concern for prospective ETF entrants?
Probably not – Europe appears a relatively diverse market in the context of the global ETF industry, where the 10 largest ETFs account for 20.3% of total assets – over $1.25 Trillion. Many of the largest ETFs are also highly commoditised ‘core’ exposures that have had a long time to gather assets – for example 3 of the 10 are simply competing S&P 500 funds!
Herein lies the bite – there’s little scope for differentiation among core exposures outside of price – and only the largest companies have the economies of scale necessary to compete purely on a low-cost basis.
It’s unlikely that any new entrant to the European ETF market would want to launch another S&P 500 or FTSE 100 ETF. The massive concentration in the largest ETFs belies a vibrant industry of smaller and mid-sized providers competing outside of the core in a variety of asset classes and strategies.
Looking at the most successful ETF launches of January 2020, we note that there are almost no ‘big name’ issuers in the top ten and many of the funds have strong ‘thematic’ themes, or are being provided by new players brining speciality ideas to new markets. There is ample scope for managers with new ideas to raise substantial assets by offering their investment IP in an ETF format.
|Name||AUM $M (Jan 2020)|
|Efund SI SOE The Belt & Road ETF||1,153|
|Bharat Bond ETF April 2023||977|
|Bharat Bond ETF April 2030||757|
|Global X China Electric Vehicle ETF||122|
|BMO Premium Yield ETF||92|
|ICBC Credit Suisse CSI 500 ETF||88|
|Global X China Consumer Brand ETF||87|
|CCB Principle Esunny Chemical Futures ETF||57|
|Invesco US Treasury Bond 0-1 Y UCITS ETF||47|
|Global X China Clean Energy ETF||42|
Source: ETFGI: Data as of Jan, 2020
The above illustrates that a smaller ETF issuer can achieve significant success with the right product for the market and that innovation in the ETF industry is frequently driven by the mid and smaller tier players. But, as one swallow doesn’t make a summer, one successful ETF does not guarantee a sustainable ETF business. And this is where smaller asset managers are at a disadvantage relative to the giant players:
Double Edged Sword of Innovation: Smaller asset managers need a distinctive approach or strategy to differentiate themselves in a crowded market. The risk is that a larger issuer can copy their idea, quickly create a ‘me too’ strategy and roll it out at lower cost – effectively bypassing the need for either innovation, bravery or R&D, destroying competition.
Cost of Failure: Were iShares, SSGA or Vanguard to launch an ETF that gathered no assets, they have enough revenues from their other products to shake-off the loss. A manager with only one or two ETFs does not have this luxury.
Marketing Power: It takes time, significant investment and hard-to-find skills to build a pan-European ETF brand and marketing infrastructure. Establishing an ETF marketing capability with scale could cost upwards of £500,000, not including staffing costs. Large ETF players benefit from the influence that their order flow, AUM-based index license fees and advertising buying power to negotiate marketing ‘contributions’ from their service providers that can run into $ millions- contributions that are not extended to smaller players.
Distribution Power: The complexity of ETF distribution in Europe (different languages, regulators, currencies, distribution platforms, exchanges and liquidity providers) can make it difficult for new entrants to gain traction. This can create a vicious cycle whereby low assets and trading volumes prevent platforms from adopting ETFs, which in turn, make it harder to gain assets and generate liquidity.
Shareholder and Lobbying Power: With well-staffed Government Affairs teams and influence over $trillions of assets, larger ETF issuers can have disproportionate impact on both regulatory direction and corporate behaviour. When a large manager of active and passive funds can be invited to Davos, advocate for wider ESG integration in public letters and simultaneously push an ESG fund range, the lines between activist investment and index investment begin to blur – to the detriment of smaller market participants who hold less sway over policy and regulatory decisions.
Different Markets, Different Distribution Partners
The relative success of small and mid-tier issuers in the US market may give comfort to prospective European issuers who are thinking of launching an ETF, but the differences in market structure, distribution channels and investor mindsets can make a significant difference to the survival and success of an ETF.
The U.S. is a homogenous market with one currency, one regulatory environment, a consolidated tape and only a few exchanges listing ETFs. Investors well versed in self-directed investing via 401Ks and other personal investment schemes means that there is a high degree of retail investment literacy, a strong brokerage culture and a distribution structure that revolves around RIAs (Registered Investment Advisors) and Wirehouses (large broker-dealers such as Charles Schwab, Morgan Stanley, Merrill Lynch and UBS.) Placing an ETF on one of these platforms makes it instantly visible and tradable to almost the entire addressable domestic investor market. No such mechanism that provides a continent-wide shopfront is available in Europe.
Different Markets, Different Investors
Advertising can reveal a lot about a market. If you visit New York, Chicago or Boston you will see plenty of adverts from ETF issuers on TV, radio, billboards, subways and mainstream news and investing websites. In contrast, in Europe you rarely see an ETF advert outside of the industry media. This difference in promotional activity can be explained by the different audiences that issuers are trying to target, and the relative investment literacy of the markets.
The U.S. ETF market is estimated to be split 25:75 between institutional and retail investors. In contrast, Europe is predominantly an institutional market (although retail is growing fast and some countries, like Italy, have a high retail participation) that requires a different type of marketing and sales strategy- the decision-making process for an institution to on board an ETF is far more extended and complex than an individual investor simply opening up their brokerage app on a smartphone or clicking on a banner ad.
Historically, European fund distribution and wealth management have been heavily influenced by domestic banks and each country had a different bank(s) that were important to work with to establish market footprint. The legacy of this structure can still be seen in the top 4 largest European ETF Issuers, all of whom benefited from being owned by banks and therefore able to quickly gain geographically specific market share by distributing their own products to a captive audience: iShares & Barclays (UK), DWS & Deutsche Bank (Germany), Lyxor & Societe Generale (France) and UBS (Switzerland).
Since the inception of European ETFs, the distribution landscape has become more complicated. Instead of a handful of wire houses, European ETF issuers must contend with more than 20 exchanges and a massive array of different local platforms, each with their own due diligence, eligibility criteria, onboarding process and costs. As you can’t sell a product that’s not on a shelf, an ETF issuer will need to know, engage with and onboard with dozens of platforms in many countries – an intimidating task for the uninitiated.
On top of this, there are a growing number of wrap platforms, local brokerages, model portfolio providers, ROBO advisors and advisor networks that also need to be targeted. Knowing where and how to get started in such a fragmented, complex and confusing landscape can be very challenging for companies that lack European ETF experience, but getting it right can be the difference between a successful fund and a failure.
ETFs As Distribution Technology & Impact on Investors
Developing an ETF range which can be offered alongside other structures like mutual funds, structured products, separately managed accounts or investment trusts is now a strategic priority for many traditional asset management businesses.
Just as a coffee company can sell their product as beans, ground coffee, pods, instant powder or pre-mixed iced coffee, so can an asset manager add to their distribution firepower by adding an ETF category to their product range. Many will already offer multiple wrappers including mutual funds, hedge funds, structured products and so on. Adding ETFs is simply extending this footprint.
Without an ETF range, asset managers risk being excluded from the many distribution channels that are focused on ETFs and will be at a significant competitive disadvantage to managers who recognised the distribution potential of ETFs earlier on. While many investors have replaced expensive, clunky index mutual funds and ‘closet trackers’ with ETFs, there are currently limited options for investors to perform the same exercise for the actively managed portion of their portfolios – but this is changing fast
Traditional fund managers can benefit from this by giving investors (who may have strong brand loyalty to a particular fund provider) the opportunity to buy the strategies they like in ETF format – offering significant improvements to their current experience by adding liquidity, tradability and lower entry and top-up rates.
Imagining a More Diverse European ETF Market
A more diverse ETF market will benefit investors, asset managers, exchanges and fund selectors alike:
- Number of ETF issuers increasing and de-concentration of assets
- Traditional asset managers re profiling successful strategies as ETFs
- Active managers launching ETFs
- More innovative strategies and niche exposures (that larger, more conservative institutions may not be willing to launch)
- Further cost reductions for core exposures and introduction of more higher bps value-adding strategies
- Greater choice for fund selectors so that they can reduce dependency on a handful of counter parties
- Increased competition in indexing and downward cost pressure on index license fees
The first step to achieve this vision is for asset managers to break the link between ETFs and indices and reconsider ETFs as a disruptive distribution technology that is applicable for any (liquid) asset class, passive, systematic or active strategy. (Our other papers “Win the Future” and “Don’t Look” covered these issues in more detail). As a distribution wrapper, ETFs have the potential to transform the ability of asset managers to deliver their investment IP – including active strategies – to a much broader audience than was possible with traditional funds.
De-Risking and Breaking Down Barriers to Entry
When € Millions are needed simply to get to the point of launch, the risk of going it alone may be too much for many asset managers to face. So why do so many U.S. asset managers feel empowered to take the leap when European peers do not? Is there a less risky way to enter the market? Enter the white-label provider.
The White-Label Advantage
U.S. asset managers have been able to take advantage of white-label ETF platforms for a number of years. These platforms provide all the necessary regulatory, operational and capital markets infrastructure to manage an ETF meaning an asset manager can ‘plug in’ and bring an ETF to market quickly, and at a significant cost saving compared to going it alone. This model also makes it economically viable for asset managers who may only want to launch one of two ETFs but do not want to invest in their own infrastructure. With less set-up costs, U.S. mangers can focus more on distribution, marketing and sales – services that are not typically offered by U.S. white-label platforms.
With dozens of ETFs now available via white-label platforms, the experience of the U.S. shows that there is a wave of new investment ideas that investors want to buy, that can be unleashed in an ETF format and that can carve out distinct niches in the face of the giant issuers with the right idea at the right time. And while platforms do not guarantee a successful ETF, they can, at worst decrease the cost of failure.
The primary advantages for asset managers using a white-label platform are:
- Cost efficiency – massive reduction in cost-to-market
- Rapid market entry – by leveraging an existing infrastructure, an ETF can be brought to market in ~8 weeks
- Large scale – with an existing sales, distribution and marketing infrastructure, white-label platforms can offer broad reach and high scalability from day one
- Small scale – managers who want to launch only 1 or 2 ETFs can do so economically via a white-label provider
- Expertise – clients without experience in the nuances of European ETFs can gain immediate access to experienced sales, distribution, capital markets and marketing professionals
- Focus – outsourcing the day-to-day management of an ETF enables asset managers to focus on developing and refining new investment propositions
With the launch of HANetf in 2017, Europe gained its first independent white-label ETF platform, opening the gates for a wave of innovation and new participants in the European market. Given the fragmentation of the European marketplace, and the differences between ETF and Mutual Fund distribution, HANetf provides not only a UCITS ETF platform but also an embedded sales, marketing, distribution and PR capability, giving on-platform funds the greatest chance of success by providing an experienced pan-European sales team and sophisticated digital marketing infrastructure from day one.
The impact is already being seen as the barriers to entry diminish – as of January 2021, HANetf has launched 12 ETFs and ETPs with 9 asset managers, each with very different businesses and approaches, including:
- EMQQ / Big Tree Capital: was an established U.S. based ETF issuer and active fund manager that wanted to bring a successful U.S. listed ETF to Europe in UCITS format.
- Gins Global Index Funds is an established U.S., Africa and Asia-based provider of traditional index mutual funds that wanted to future-proof their business by offering ETFs and extend their geographical reach into Europe.
- Purpose Investments is a Canadian-based provider of active mutual funds and ETFs that wanted to extend their distribution into the high growth European market
- Britain’s oldest company – The Royal Mint. With over 1,100 years of history, The Royal Mint wanted to create a gold ETP as part of it’s programme to modernise and diversify away from its core business of creating UK coinage.
“Any colour, as long as it’s black” is hardly a choice. The concentration of ETF markets in both Europe and U.S. is a negative for investors, fund selectors and asset managers in equal measure.
Fortunately, the competitive landscape is changing – while the battle is largely won for ETFs 1.0 – equity index tracking core exposures; the battles for ETFs 2.0 (Smart Beta) and ETFs 3.0 (Thematic and Active) remain undecided and provide a huge opportunity for creative asset managers to gain traction and find success.
The advent of white-label ETF platforms in Europe, like HANetf, are game-changers for asset managers that want to establish a European ETF footprint without the cost, complexity, risk and time commitment that would otherwise be part and parcel of launching an ETF. Simply put -you no longer need to know about ETFs to have a successful European ETF business.
White-label platforms are a force that is helping to reshape the European ETF industry, bringing real democracy to the world’s most democratic investment industry.
HANetf is an independent ETF specialist working with third-party asset managers to bring differentiated, modern and innovative ETF exposures to European investors. Founded by two of Europe’s leading ETF entrepreneurs, Hector McNeil and Nik Bienkowski, HANetf provides a complete operational, regulatory, distribution and marketing solution for asset managers who want to successfully launch and manage UCITS ETFs.
HANetf White-Label Platform