For some time, the passive market across Europe has been largely an institutional phenomenon. However, the pandemic, regulatory change and new entrants have galvanised the retail investor, bringing demand for new types of products.
Could this be the blast the passive market needs in Europe?
Cost efficient beta
Passive remains only lightly penetrated in Europe, at around one-fifth of the market. However, it is dominated by specific markets, such as the UK.
Figures from Morningstar show that passive funds have only achieved around 8% penetration in France and nearly 12% in Germany, just over 2% in Spain, and in Italy, it is less than 1%.
Hector McNeil, co-chief executive at HanETF, says passive in Europe has been led by the major ‘supermarket’ ETF providers, most notably Blackrock/Ishares, followed by DWS and Lyxor. He says: “Institutional and professional investors such as wealth managers and private banks are mass users of cost efficient beta like the S&P500, MSCI Emerging markets and Gold ETFs to name a few and specialise in asset allocation where they put together diversified portfolios using ETFs.”
However, the passive market is changing, and the rise of a more active retail investor is part of the story.
Stefan Kaba-Ferreiro, is the head of trading and managing partner of GHCO, says the pandemic, combined with loose monetary policy and low rates, are bringing in new investors, creating demand from a lot of people who have never invested before. He says people are increasingly looking beyond traditional benchmark products such as the Eurostoxx, and are instead looking at thematics – technology, healthcare and so on.
McNeil agrees: “Retail investors and financial advisers have used the cost-efficient passive ETFs as well, but are increasingly looking at the more adventurous ETFs such as thematics to give them more exotic exposures and mega trends they can see affecting them and they want to invest in. The covid-19 crisis has further amplified this trend and areas such as healthcare, ecommerce, cloud technology have performed very well and see massive asset inflows.”
In many cases, this has driven strong performance and created a virtuous circle. The Medical Cannabis and Wellness Ucits ETF (CBDX) and the Emerging Markets Internet and Ecommerce Ucits ETF, for example, are up over 100% a rolling year to 28 Feb 2021.
These ‘story’ ETFs have particular appeal for a new breed of retail investor, who now have the tools to buy into these ideas.
Fannie Wurtz, head of Amundi ETF, indexing and smart beta, agrees that accessibility is important: “New European regulatory initiatives such as Mifid II are already boosting the use of ETFs. The development of online platforms is important: clients can access ETFs through their online banks and brokers, and this is particularly striking in Germany which is one of the most mature ETF retail markets where the ETF savings plans are increasing.”
This is creating a more diversified market. Firms can build their brands on a single popular product. Kaba-Ferreiro adds: “Companies are launching with a good flagship product and this gets their brand name out there.”
That said, he believes larger companies have a vital role in opening up the market and providing cheap options. Certainly, it appears that big name brands such as Vanguard can ‘open up’ a market to passive. The group has recently opened an office in Italy, for example. While it is difficult to say what is cause and effect, the marketing clout of a big name can draw in new investors for passive.
Simone Rosti, country head Italy, Vanguard, says: “I do believe however that since our arrival in Italy, we have played a role in the market, and we have made a difference. However there is more to be done, in Italy and elsewhere. Looking at the global percentage of Assets under Management held in passive products, there is still a lot of room to grow, and the ETF remains the product of choice for investors across the globe to take part in the financial markets. The ETF truly has enabled investors to access the market at prices that were previously only available for large institutions.”
Greater awareness may alert investors to the price they’re paying for their investments. In a recent speech, Verena Ross, executive director of the European Securities and Markets Authority, warned that the current system of inducements may be preventing investors getting access to lower cost products. The system continues to reward distributors for selling more expensive actively managed funds, which has been a major hurdle for the penetration of passive. It is notable that countries where this type of kickback is more common have lower passive penetration rates.
Nevertheless, it is clear that the adviser market is starting to take notice of passive options. Wurtz at Amundi points to the development of ETF-based solutions where distributors are using ETFs as building blocks, wrapped up with additional services such as marketing and education.
Vanguard’s Rosti says: “We are partnering more and more with advisers in Italy. They are now more and more experiencing the benefits of ETFs, also on the multi-asset side with our LifeStrategy range.
“This is important, because a multi-asset ETF solution allows them to divert their time away from functioning as ‘portfolio managers’ for clients, to actually spend quality time with their clients, and coach them, especially in these volatile times. We are shifting gears and we are convincing more investors about the benefits of ETFs.”
Ultimately, the passive market in Europe is shifting, as investors demand more diverse options and cheaper products. Advisers can only ignore this for so long, particularly as regulatory pressure mounts.