Why Europe’s ETF Industry Will Never Catch Up With The US

“We’re five years behind the US. More likely ten years behind the US – no, make that 20 years.”

Sound familiar?

Europe is constantly being lambasted for its slow growth of exchange traded funds (ETFs) and passive vehicles compared to its Atlantic cousin, where innovation is flowing and most investors are emerging from the retail sphere. Europe aside, Asia is trailing far behind both continents and the outlook is arguably more sluggish, despite the recent hype over Chinese A-share ETFs.

The ETF.com conference in Florida last month was a shining example of the European ETF industry’s potential. I’m not just talking about the general buzz around passives over there – the proof was in the pudding with over 1500 attendees – and neither am I just talking about assets invested in ETPs – $406.8 billion in Europe compared to $1.6 trillion in the US as of January – but I’m also talking about new innovations: active ETFs, new and improved strategies, and, can you believe it, even smarter beta.

It was exciting. Move over, min vol. Hello equal weighted, dividend weighted, and a sea of single country ETF offerings. Here in Florida was a room full of financial advisers who were keen to learn how to best select an ETF, how best to trade an ETF, and how best to educate themselves on new ETF trends.

But Europe will never look like the US. That is because Europe is one large continent; it is a map of countless languages, several currencies and many different mannerisms. This extends to differences in investor behaviour. In Italy, for example, they love short and leveraged funds and tend to take higher risk, while conservative German investors are more likely to stick to bunds. The US is one nation, one language and one process, which enables heightened product liquidity and falling costs for the end investor.

This might go some way to explaining why Europe has so many products, but not that many assets in them. (Europe claims 41 percent of all ETP listings, yet the US claims over 70  percent of global ETP assets.)

Steffen Scheuble, chief executive of German indexer Solactive, told me that in Europe, the banks sell to their networks.

He said: “In Europe you don’t have the likes of WisdomTree or ProShares, so it’s really the way that distribution is completely different. That leads to a lot of similar products.”

Scheuble also pinpointed the due diligence mentality of Europe, which slows down innovation, compared to the more free-spirited, trial and error attitude in the US. However, he pointed to one silver lining:

“The US appears to be five years ahead of the European market, but it’s a smaller gap when it comes to smart beta. Many banks are working on concepts currently, and they should be launched soon.”

Europe has effectively closed the gap with the US by missing one step in ETF evolution, he said, which is single country ETFs. But that could turn around. Just yesterday, for example, Lyxor announced the launch of a Mexico ETF in Paris.

In truth, Europe is making its own brave shots at fighting fragmentation too. For example, the first centrally settled ETF from iShares was cross-listed on the NYSE Euronext Amsterdam exchange yesterday. Also in the news this week, Lyxor Asset Management launched the first ETF to track member countries of the Organisation for Economic Co-operation and Development (OECD), in order to minimise potential regulatory issues faced by institutional investors when it comes to emerging market investment.

Admittedly, there is still a lot of misinformation in Europe as to the ETF industry. Take the Financial Times’ columnist John Authors, who wrote last week that ETFs are to blame for the outflows in emerging markets. But the fact is that ETFs respond to market conditions, not the other way round, and emerging markets have always been volatile.

The US is ahead of Europe now, and will always be. But that doesn’t mean European investors are inherently disadvantaged. They can enjoy the ride of growing popularity of passives and increasing liquidity, as cited by the likes of Fitch Ratings and PricewaterhouseCoopers in recent reports.

And don’t forget – in some ways, we are ahead. The UK banned commission-driven sales from financial advisers as of January, and this regulatory change is likely to be mirrored across the continent in the future. The UK has also banned stamp duty on UK domiciled ETFs, and stock exchanges are actively working to boost liquidity. While we might always be playing “catch up”, it is important to remember that Europe has its own innovations and success stories.