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Research Reports » Clearstream Oct 2017

What the experts say

We consulted a panel of experts on the ETF industry to put the survey findings in context and add their opinions.


ADAM LAIRD, HEAD OF ETF STRATEGY, NORTHERN EUROPE, LYXOR

“Cost will be the number-one factor for investors for a long time. I know that from experience: as a provider, we’ve made 20 fee cuts this year so far.

Investors feed back to us constantly that this is a major selection factor. There are some places where investors are happy to pay a premium in more niche strategies. But if you’re investing in, say, broad European equities, a lot of people want it for under 0.1% TER [total expense ratio].

In terms of who uses ETFs, in our experience, the biggest users are asset managers and the biggest growth market is wealth managers and private banks. In other words, the biggest area for ETF use tends not to be individuals but active investment selectors who are simply using ETFs as the tool to execute their portfolio.”


ANDREW WALSH, HEAD OF PASSIVE & ETF SPECIALIST SALES, UK AND IRELAND, UBS ASSET MANAGEMENT

“The ETF industry is already very efficient, similar to the car industry, for example. You’re not going to get car prices dropping 20%.

People think if you charge 20 basis points you’re making 20 basis points, but that’s not the case. The index fees could be 4-5 basis points and then you have custodian fees and other fees. At ten basis points, you’re already massively lean.

While, on the whole, I would expect fees to come down fractionally, there may be scope for a slight increase in pricing, on average. The thinking here is that not many people are launching funds tracking well-known indices any more. Instead, newly launched ETFs tend to track niche indices, with higher fees.”

“Five years ago, a fund could potentially gain 30 basis points of extra performance with securities lending. Nowadays, you might make three basis points. This has changed massively.

People tend to focus on ETFs as the bad guys even though the active management industry also does securities lending. The result is that ETFs have the spotlight on us and we as an industry have been at the forefront of improving transparency.

My view is that if you can enhance the performance of the fund, why wouldn’t you do it? We only allow 50% of a fund’s assets to be lent out at any time, though in practice, it’s rarely more than 10%. A fund must be a certain size before you can do securities lending and we don’t do it in fixed income or in our socially responsible investment (SRI) funds.”


MANOOJ MISTRY, HEAD OF PASSIVE ASSET MANAGEMENT, EUROPE, MIDDLE EAST AND AFRICA, DEUTSCHE ASSET MANAGEMENT

“Although we have fund passporting in Europe, the different markets have different tax and distribution requirements. This is why there are something like three times as many mutual funds in Europe as the US and yet the US has three times as many assets.

There has been consolidation in market infrastructures: for example, the Euronext exchange. However, when stock exchanges in Paris, Amsterdam, Lisbon and so on trade under Euronext, they still have their individual settlements systems behind the trade. There has not been consolidation on the back end.

I would agree there is a lot of fragmentation in Europe, but whether it is an issue is another question.”


JAN VAN ECK, CHIEF EXECUTIVE, VANECK

“To me, the biggest potential change is MiFID II, when all trading will be on exchange. Yes, Europe is fragmented by country but the biggest fragmentation is between on-exchange ETF trading done by individuals and off-exchange trading done by institutions. If you’re an individual German investor using an online broker, you’re going to get on-exchange execution, which is less attractive than the kind of execution institutions are getting.

This change is positive. The fact that all ETF trading is visible in the US is a huge plus. At VanEck, we have far more assets from European investors in our US ETFs than we have in our Ucits ETFs and the reason, I think, is they are attracted by the liquidity they see in the US. If Europe can compete with that, that’s tremendous for Europe.”


FANNIE WURTZ MANAGING DIRECTOR, AMUNDI ETF, INDEXING & SMART BETA

“The retail market is a strong growth driver for the ETF industry, along with more traditional professional investors. The access to ETFs in Europe for retail investors will evolve thanks to the development of packaged solutions with ETFs as underlyings. Distribution networks are indeed seeking new offerings, and ETFs are a perfect tool.

Cost is obviously a key selection criteria. In an environment characterised by high volatility and low yields, offering investment solutions at competitive pricing is crucial.

A new phase of development in the ETF world is fixed income. Investors are seeking granularity in asset allocation. ETFs, as they enable investors to access a market or segment in a single transaction, are an ideal candidate for such usages, though the provider must take care to monitor liquidity.”


PHILIPPE SEYLL, CO-CHIEF EXECUTIVE OFFICER, CLEARSTREAM BANKING

“ETFs are likely to be troubled by market fragmentation problems, which is why Clearstream has expanded its cross-border fund processing platform into multi-listed ETFs. The platform allows, for example, a French investor to buy into a German-listed ETF and sell it on the UK stock exchange seamlessly. Although fund units are custodised in the countries where they are listed and sold, Clearstream creates a mirror of transactions in its international central securities depository (ICSD) in Luxembourg. The service allows for transactions in ETFs listed in multiple exchanges, without complexity for the client.

As an ICSD, Clearstream also offers issuance models for ETFs which have been adopted by some major issuers, improving liquidity, reducing cost and speeding up realignments within Europe. ETFs benefit from Clearstream’s direct access to the Eurosystem’s settlement platform Target2-Securities and to the international distribution network.”

©2017 funds europe