Europe, Take Note: Top 5 U.S. ETF Trends

The exchange-traded fund (ETF) industry hit a milestone this year when assets under management (AUM) broke through the $3 trillion mark, but the vast majority of that headline figure comes from the U.S. The European industry is still playing catch-up, both in terms of AUM and variety of products. What are the top five development investors can expect to see from the U.S. play out in Europe?

1) Interest-Rate Hedged ETFs

Interest rates – will they or won't they rise? That is the question. The U.S. Federal Reserve has indicated it is likely to raise rates this year and the Bank of England's governor, Mark Carney, has said that a rise in UK rates is "drawing closer". Eric Balchunas, senior ETF analyst at Bloomberg, thinks interest-rate hedged ETFs are going to be "the next big thing".

"If rates start to rise at some point this year in the U.S., these products are going to outperform regular fixed income ETFs. If we see a long-term rate rise, interest-rate hedged ETFs will kill them,” he said.

Where the Fed starts, other markets follow.

"Rate rising could start in U.S. and make its way throughout the world, and if the world sees a rising rate environment, people will jump out of currency-hedged ETFs and into these," predicts Balchunas.

2) Thematic ETFs

ETFs track more than just regular stocks – last year ETF Securities launched the first European ETF that offers exposure to the global robotics and automation sector.

Jacques Lemoisson, head of equity and ETF advisory at Swiss private bank Lombard Odier, believes issuers this diversity of product will only continue in Europe, but the U.S. is still very much ahead.

"We had to wait five to six years to see the first European-domiciled ETF on biotechnology,” he said. “When we see something special like thematic funds for robotics or biotech in the U.S. we have a huge time lag between when it is issued and when it arrives in Europe. The diversity is huge in the States."

3) Exchange Traded Managed Funds (ETMF)

ETMFs could be described as a fusion between traditional actively managed mutual funds and passively managed ETFs. Boston-based investment manager Eaton Vance was granted permission in November by the U.S. Securities and Exchange Commission to offer this hybrid to investors, by the name of NextShares. It's still early days, but Lemoisson believes the concept could catch on in Europe.

"It's a new kind of vision of the ETF world," he said.

4) Consolidated Tape

A consolidated tape pools data across multiple exchanges and allows investors to find the best price for a product. This exists in the U.S., but has yet to catch on in Europe.

However, pan-European legislation, the Markets in Financial Instruments Directive II, could change that amid pressure from large ETF players such as BlackRock's iShares and Vanguard Asset Management. A consolidated tape would attract more European investors to ETFs, by offering better transparency on trading volumes and helping them find the best price.

5) Bigger Price War

ETF issuers compete to create the hottest new product to lure investors, but traditional ETFs that offer low-cost passive exposure to major indices still account for a huge chunk of ETF assets. These traditional ETFs are relatively cheap for investors as issuers such as Vanguard Asset Management slash fees to remain competitive.

"When Vanguard shows up, it's good for investors – it forces everyone to lower fees,” said Balchunas. He added that even though investors can get fixated on other trends like new and exciting products, the trend of cheaper prices and issuers cutting fees will continue.