From Leader To Laggard

September 10, 2013

 

Until the turn of the decade, Europe’s exchange-traded fund (ETF) industry set the pace in the rapidly growing global tracker fund business. Europe’s ETF assets expanded at a much faster rate than in either the more mature US market or the nascent Asian ETF sector.

Between 2005 and 2010 European ETF assets grew nearly six-fold, from $50 billion (€37 billion) to $283 billion, a compound annual growth rate of over 40 percent.

But since then the rate of expansion of the European ETF market has slowed dramatically.

In 2011 the European ETF market shrank for the first time on an annual basis, recording a 5 percent decline in assets from the previous year-end total. The drop reflected both a slower rate of investor purchases of tracker funds and a decline in European share averages during a year marked by the intensifying eurozone crisis.

And while European ETF assets grew by more than 20 percent in the following year, 2012, so far in 2013 the net new cash flows into European-listed funds have trailed those in the US and Asia, both on an absolute and a percentage basis.

According to Deutsche Bank’s latest “European ETF weekly” report, US-listed ETFs have attracted $121 billion of net new assets in the year to date, around 10 percent of the market’s previous year-end asset total.

In Asia, ETFs have attracted $13.4 billion in new cash flows so far this year, also around 10 percent of the region’s 2012 year-end assets.

But in Europe year-to-date net purchases of ETFs currently total $12.9 billion, only around 3.9 percent of the 2012 asset total, a much lower growth rate than in the two other key global regions.

Is the decline in the European ETF market’s growth rate a sign that market has matured, or does it reflect temporary impediments that may be reversed?

According to Stephen Cohen, iShares’ European chief investment strategist, Europe’s ETF growth slowdown is partly down to structural factors and partly a reflection of the negative market sentiment that has beset the region since 2011.

“Retail investors’ use of ETFs is much less widespread in Europe than it is in the US,” Cohen told IndexUniverse.eu in a telephone interview. “Retail investors have driven a large part of this year’s ETF fund flows in the US, particularly purchases of domestic US equity funds.”

“A second reason for the recent slowdown in the European ETF market’s growth rate is that European investors have tended to be more cautious than US investors, particularly over the last few years, when Europe was the centre of market volatility and uncertainty,” added Cohen. “US ETF investors tend to have a larger weighting in equities than European investors, who have higher bond weightings.”

Meanwhile a lot of the recent pickup in demand for Asian-domiciled ETFs comes from the revival in fortunes in one of the region’s major equity markets, Japan, iShares notes.

“Almost all of the net new demand for Asian ETFs in 2013 has come from purchases of funds tracking Japanese share indices,” said Cohen. “Much of it is domestically driven.”

But it would be a mistake to draw too pessimistic a conclusion about the future prospects of the European ETF market from the recent growth slowdown, argues the iShares executive. Regulatory change should help drive new ETF demand in the region, while a cyclical upswing could also help.

“A long-term source of European ETF market growth is the change in the regulatory landscape, reflected by initiatives like the UK’s Retail Distribution Review (RDR),” Cohen told IndexUniverse.eu.

“This should lead in the long term to greater adoption of ETFs by retail investors, insurance companies and pension funds. Europe is five years behind the US on this comparison.”

 

 

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