Inside Europe’s First ETF White Label

Hector McNeil and Nik Bienkowski have a long entrepreneurial record in the ETF industry. As managing partners, they were pivotal in the success of ETF Securities; they also started Boost ETFs in Europe, which they eventually sold to WisdomTree in 2014—a U.S. issuer they later co-helmed in the European market.

Now they’re launching another venture, HANetf, Europe’s first white-label ETF provider. The firm is looking to help U.S. issuers and European asset managers new to the space bring ETFs to the European market for the first time. McNeil gives us the inside scoop on the barriers to entry and the opportunities for growth.

ETF.com: Has the structure required to issue ETFs in Europe been a barrier to entry to U.S. issuers? Is it that different from the U.S.?

Hector McNeil: Europe is the second-biggest ETF market in the world. It just popped through $700 billion in assets. It's had its fastest-growing year ever this year, and last year’s asset growth was a record. And European investors tend to prefer the UCITS structure to the ’40 Act.

If you've got a global clientele outside the U.S., they tend to like UCITS because it’s usually friendlier from a tax perspective. Under the ’40-Act wrapper, if you don't file a W-8BEN form for the U.S. tax authorities, you get charged with withholding tax. So, anybody offshore that doesn't want to file the W-8BEN form or be on the radar of tax authorities, they'll have a tax disadvantage with an ETF versus UCITS.

That's the same if you go to Merrill Lynch or Morgan Stanley in San Diego or Miami. They’ll have an onshore and an offshore team, and the offshore team will prefer to run the same ETF portfolios—but with UCITS for that very reason. For all we talk about Europe as one place, it's 30-plus countries that have different languages, taxes, different trading systems, different settlement systems, and obviously things like Brexit.

All these types of complexities don't exist in the U.S. Firms will come and it will take them anywhere between three to five years to figure out those complexities and what's required. That costs them a lot of money, time and opportunity. We’ve done that journey three times now all successfully, so we feel pretty confident we can provide a coherent rollout platform.

One essential difference relative to U.S. white-label providers is that we'll be not just providing the compliance and the fund umbrellas and structures, we'll also be doing distribution, marketing, sales, all those types of things, which, typically, U.S. white labels don't do. The only thing issuers will need to worry about is the investment strategies and what sort of ETFs they want to roll out.

ETF.com: I'm sure you read all the drama recently involving ETF Managers Group and PureFunds about the ETFMG Prime Cyber Security ETF (HACK). Is your platform essentially a middleman renting out services for a fee, or do you have control over the ETFs?

McNeil: The structure is a lot more benign in Europe than it is in the U.S. The boards in the U.S. are a lot more activist than they are in Europe. You tend to find that the boards in Europe are more about simply making sure the ETF runs as it should and it's meeting all its obligations, etc.

Our simplistic view of this is that the strategy that the issuer or asset manager will be bringing to the table—which we will issue through our funds—is owned and retained by the asset manager. That's their intellectual property. They can bring it to the platform and take away from the platform if they want to.

We have no issue with anybody wanting to use our platform as a way to dip their toe in the water, to try three, four, five funds in the European market, and see if they get traction. If at some point they want to move that in-house, we'll have commercial terms that will allow them to do that. Our platform is open architecture.

ETF.com: Will the ETFs all listed in the U.K. and then all European investors have access? How does the listing work?

McNeil: There are several layers to this. About 60% of all ETFs in Europe are domiciled in Ireland. The next biggest listing venue is Luxembourg, with about 18-20%. Our ETF fund company will be domiciled in Dublin, Ireland.

What happens is you cross-list across the markets. Our core service will be U.K., Italy and Germany—the Borsa Italiana, Deutsche Boerse and the London Stock Exchange. We’ll also tap into markets such as Switzerland, France, Holland, etc., but they’ll be more to demand.

Typically, each ETF is listed in four or five markets in Europe. That allows you to be local in those markets from a shop-window perspective. For instance, an Italian journalist wouldn't cover a product that's listed in London as an Italian product. But if it's listed on the Borsa Italiana, it's essentially seen as local.

ETF.com: iShares and Vanguard already have ETFs in Europe. Is the target here more midtier, or lower-tier issuers, in terms of assets?

McNeil: There are a few issuers already in Europe. iShares is the biggest in Europe as well as the biggest in the U.S. Vanguard is big in Europe but not as big as it is in the U.S., top 10. But their product range is quite small here.

But for us, it's the next layer down. It's the equivalent of the WisdomTrees of the world that haven't made it over here yet. Even some of the smaller guys who have one or two products and are quite successful, they're getting calls from European clients or other clients who show interest.

We have two main target groups: U.S. issuers and the European asset managers new to ETFs.

ETF.com: Do you anticipate U.S. issuers will use your platform to bring to Europe strategies that have been successful in the U.S. and replicate them there? Or are they going to be creating completely new strategies targeted at European niches?

McNeil: I think initially they want to replicate what they're doing already in the U.S. There’s demand for these successful U.S. strategies coming from offshore desks in the wire houses and wealth managers, who are looking for these strategies for offshore clients. 

Initially, U.S. issuers will list in Europe what I call a handful of “superstars,” their top U.S.-listed ETF products.

But then they'll get customer feedback, and they’ll say they have other products that are based specifically in the U.S. but that are strategies that can lend themselves to European equities, and new products will emerge. We'll come in and do some business development to create similar products with different exposure for European investors. 

But, yes, initially I think they'll bring over to Europe their flagship products.

ETF.com: Can’t European investors just buy ETFs in the U.S. market?

McNeil: They used to, but it's becoming much more restrictive now from a regulatory perspective. For instance, in the past, mutual fund managers in Europe would have been able to buy U.S. ETFs. Now they're not able to do that unless the U.S. issuers have certain tax exemptions and meet certain regulatory requirements, which most of them don't. Instead, we’re seeing European asset managers having to exit those U.S. ETFs.

That's one of the major reasons we see opportunity in the $700 billion Europe ETF market. That may seem small relative to the U.S., but the next largest is Japan, which is a couple hundred billion. It's significantly bigger than anywhere else in the world, and growing as quickly, if not faster, than the U.S.

ETF.com: In the U.S., we predict the ETF market to surpass the mutual fund market by 2025. What’s your projection for the European market?

McNeil: I typically say that Europe is five years behind the U.S. in terms of the rate of growth, the type of products, the adoption by advisors and wealth managers, etc. I've been involved in ETFs since the early 2000s, and that's always been the case.

If you're looking at 2025, I’d say we could be looking at 2030. There’s a lot of regulatory change coming around transparency and robustness and costs. All that sort of stuff is really playing into ETFs in Europe.

Contact Cinthia Murphy at [email protected]