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The Inbetweeners

Happy birthday European domiciled ETFs! You are 20 years old this year and we, at marketBeta, have watched you mature from your first instance as an open-ended European domiciled ETF structure in 2000[1].

Here are some words of advice (borrowed from Jordan Peterson[2]) to help you venture successfully into adulthood.

‘Stand up straight with your shoulders back’ (Rule 1)

With the European ETF market set to surpass €1tn AuM for 2020 and double in size by 2024, it remains a highly concentrated field with the top 10 promoters in Europe accounting for over 90% of overall AuM and the largest ETF (iShares) accounting for 45% of overall AuM[3]. Despite the highly concentrated landscape, management fees have steadily fallen, and new market participants have been able to gather significant amounts of inflows. marketBeta sees independent differentiated players having key roles to play and room for competition and innovation – but we stress the need to be able to articulate your product clearly and demonstrate compelling value for money. Mark your space, stand up and deliver a differentiated ETF product.

‘Pursue what is meaningful, not what is expedient’ (Rule 7)

In Europe, ETFs are typically structured as open-ended collective investment schemes (CIS) and as such, they must comply with the same CIS rules and setup process that govern their European domiciled sister funds. As highlighted in the recent CFA UK review of startups in the UK asset management industry, barriers to entry for Fund and ETF companies are low, but barriers to success can be prohibitively high (i.e. whereas it is easy to start up a fund, running a successful fund and gathering assets is still the main challenge) [4]. If you have a successful strategy in a fund, it is possible to deliver the strategy in an ETF structure to capture the additional benefits of an ETF, however, a strategy that fails to deliver its objective as a fund will likely fail to deliver its objective as an ETF – you must have a compelling strategy suitable for an ETF wrapper and be relevant to the target client base.

‘Assume the person you are listening to knows something you don’t’ (Rule 9)

Compared to the very mature Fund industry and even the elder 60-year-old niche Hedge Fund industry, the European ETF industry is only just growing its network of subject matter experts in Europe. The number of experts with in-depth knowledge and experience in building, selling and running ETFs is limited and, with the number of players looking to break into the ETF product space, we are in a war for talent. There exists a false assumption that because ETFs are CIS funds, running and distributing an ETF is the same as other funds, but the nuances specific to the ETF process make it a more complicated, real-time ecosystem. For asset managers new to ETFs, adding ETFs to your product line-up can be disruptive and startup mistakes can be costly. As European ETFs mature, an increasing number of ETFs will not celebrate their 20th birthday, let alone their 10th birthday. Fewer than half of European domiciled equity active funds survive their 10th birthday[5]. We at marketBeta recommend subject matter experts and champions who can obtain critical commitment and resources across stakeholders to provide efficient delivery for a long-term venture.

And final advise, ‘pet a cat when you encounter one in the street’ (Rule 12)

As asset managers embrace ETFs as an opportunity to distribute their unique investment strategy in a new wrapper to grow their business, rather than seeing them as threat stunting their existing business, timing to entry will be critical. With the penetration of active, alternative beta, fixed income and ESG ETFs still low in Europe, they remain one of the fastest growing growth opportunities for net new flows.  We are already seeing movements with fixed income ETFs attracting a record $61bn in net new flows in 2019, outpacing net flows for equity ETFs for the first time in three years in Europe[6]. With big merger activities slowing down and big US players setting up shops in Europe, it’s time for local players, who have been missing in action, to come out and show they are ready for the next decade and ready on their own terms. For active managers, just meeting your benchmark is no longer an option. As Moore’s Law[7] continues, the next decade will come faster than you think. Pounce on opportunities as they come, but more importantly, be vigilant and ready for the opportunity.

[1] The first European domiciled ETF products (Stoxx Europe 50 Ucits ETF and the iShares Euro Stoxx 50 Ucits ETF), launched on April 2000 on the Deutsche Börse, offering exposure to European equities through iShares, a division of Blackrock.

[2] “12 Rules for Life: An Antidote to Chaos” by Jordan Peterson (Penguin, 2019).

[3] “A Guided Tour of the European ETF Marketplace” (Morningstar, April 2019).

[4] “START-UPS IN UK ASSET MANAGEMENT: A Study of Barriers to Entry & Success”, Yang et al (CFA UK, November 2019).

[5] “Equity funds struggle to survive for more than a decade”, (FTfm based on S&P Dow Jones data, September 2019)

[6] “Passive investing boom reaches Europe as assets hit $1tn”, (Chris Flood,, January 2020).

[7] Moore's law, named after Gordon Moore, is the observation that the number of transistors in a dense integrated circuit doubles about every two years (Wikipedia).

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