November 2016

FRENCH ETFS: France’s ETF pioneers

France is home to both pioneers and major players in the exchange-traded fund industry. Although the country’s appetite for the product remains subdued, its innovations are notable, writes David Stevenson.

The exchange-traded fund (ETF) market is worth over $3 trillion (€2.7 trillion) globally and some expect that to double by 2020. However, the total assets held by ETFs in Europe is €484 billion and, while France is home to two of Europe’s top-five providers, domestic demand for the products is somewhat muted. Even though France is estimated to have almost €700 million of inflows into ETFs domiciled there this month, it seems that the bulk of investment is coming from foreign investors or small segments of the domestic market.

“It’s the discretionary fund managers getting into ETFs,” says Isabelle Bourcier, head of ETF and index funds at BNP Paribas Investment Partners Theam. “The investment funds and the financial advisers have not been involved so much with ETFs. DFMs will use ETFs to access a market they didn’t have access to [previously].”

The European ETF market as a whole is much more institutional-focused than its US counterpart, where retail investors account for a greater proportion of its users.

Another consideration holding the French ETF market back is that it’s not developed for independent financial advisers. Bourcier believes that France is not going to get into the products from a wealth management stance until there is more education, which will come through MiFID II (the Markets in Financial Instruments Directive).

Bourcier says that France will follow the pattern set by the UK’s Retail Distribution Review (RDR) with a tough stance by the regulator on retrocessions, which should boost the use of ETFs: “Clients are going to be asking for tools that are cheaper in terms of management fees. You want to give clients an allocation including ETFS in accordance to their risk appetite and profile.”

THE RETAIL SIDE
Arnaud Llinas, head of ETFs and indexing at Lyxor Asset Management, disagrees that RDR increased the use of ETFs in the UK and says Germany is the exception for proposing saving plans using ETFs, i.e. retail investments.

Llinas says his firm talks to pension funds, insurers and some private banks, with only a small percentage of retail investors through online brokers. He hopes this will change but is not as optimistic as Bourcier.

Fannie Wurtz, managing director of the ETF, indexing and smart beta business line of Amundi, says: “The ETF market is still growing fast and in Europe it’s still an expanding market in terms of products and distribution channels.”

One advantage Wurtz has over her smaller rivals is being able to make her firm’s products cheaper. She says that Amundi cut the total expense ratio of its global and regional emerging market equity ETF to 20 basis points, which, according to her, are the cheapest emerging market equity ETFs on the market.

The firm has raised more than €1.6 billion in assets for its emerging market equity ETF, representing 30% of total market flows on the same exposure this year, and also offers the cheapest MSCI Europe ETF at 15 basis points.

Theam’s Bourcier says her firm’s MSCI Japan ETF is one of the cheapest in the market, so cost is clearly a major factor when it comes to launching products. But when it comes to innovative smart beta products, it would be reasonable to assume that these come at a higher price, given the back-testing and research that goes into them.

One issue with ETFs that adversely affects small, innovative providers is that the products can’t be patented, as Lyxor’s Llinas observes. If a small provider puts out a popular and clever strategy, firms such as BlackRock can therefore step in and release the same ETF, at a much cheaper price, thanks to economies of scale.

“When you launch a smart beta product, you have to describe the methodology in a paper. Great for clients, but from a competition point of view, not so good,” says Llinas.

FIRST FRANCE, THEN THE WORLD
Bourcier makes the point that France reflects the global market – there’s less appetite for Eurozone equities ETFs, but emerging market and S&P 500 ETFs are in favour among investors. Her firm’s S&P 500 ETF has €1 billion in assets.

One growth area this year has been in fixed income ETFs – indeed, Lyxor has issued US treasury ETFs at a total expense ratio of just seven basis points. As the yields are so low for developed market sovereign bonds, the thinking is that products need to be priced accordingly.

Wurtz has developed a strategy to achieve some yield without going too far up the risk scale: Amundi offers two floating note ETFs, one BBB-rated and another a mix of investment grade and high yield among corporate bond ETFs.

Amundi has partnered with a variety of index providers so is able to offer a broad range of products. It released its second product with Scientific Beta, the commercial arm of the Edhec Institute, earlier this year.  This multi-factor smart beta product adds to the firm’s comprehensive range of mono-strategy ETFs, which include minimum volatility, mid-cap, small-cap, growth, value, high dividend and buybacks.

“Some clients want to pick and choose within mono-factor ETFs and build themselves a strategy, while others want an already mixed set of factors, which is why we also offer two multi-factor ETFs,” says Wurtz.

Bourcier does not offer any mono-factor smart beta ETFs but does offer single strategies in index funds, giving clients the building blocks to adjust the factor exposure of their portfolios.

Some of Theam’s recent ETF launches, which at present are registered only in France, include a product that boycotts anything to do with weapons, the sex industry or tobacco.

Another recent ETF launch was the MSCI emerging market ESG ETF, which screens stocks for environment, social and governance factors.

Overall, the firm has €50 billion in assets split between index funds and ETFs, although Bourcier is hoping to double the assets from both passive instruments in the next few years.

France is known for its financial mechanics, who have transformed the ETF landscape with a variety of smart beta innovations from boutique players such as Ossiam.

However, due to a European-wide phenomenon of ETFs being favoured by institutional rather than retail investors, the overall appetite for the products by French investors appears to be subdued.

Maybe this will change with upcoming legislation such as MiFID II, but as it stands, clever, innovative firms can see their ideas taken off them by the big boys and sold at half the price to the wider market.

©2016 funds europe