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Supplements » ETF Report March 2021

ETF roundtable: Seeking harmony in Europe

Funds Europe – The European ETF industry has passed the €1 trillion milestone and proven its resilience through the pandemic. As the investment vehicle becomes increasingly popular, is there now a greater need for a harmonisation of distribution channels? If so, why?

Dzanis – Investors in different countries could experience different outcomes if there are differences in preferences and how distribution models work across Europe. Every country has their own unique product choices, every country’s registration process is different, and the exchange and data providers can differ when you have ETFs listed across multiple exchanges.

Dealers frequently find themselves in a place, like we did last March, where one exchange could suspend trading while others trade during market-volatile events.

It would be good to look at things like thresholds for triggering volatility that could be harmonised across the European Union. Consolidated tape certainly is a compelling thought process to that respect. Regarding ESG regulation or harmonisation, this will help against things like greenwashing and the like as they’ll have a common standard.

Europe is much more of an institutional marketplace. With more consistency, you’ll likely see more retail investors. In the US, back in 2000, 75% of the investors in ETFs were institutional, and by 2008 it had flipped. That is an opportunity for us here in Europe to be able to normalise some of those standards and utilise that better for the market.

Shastry – Fragmentation has some challenges from a market structure point of view, but from a distribution perspective, there are markets in Europe where the retrocession model is being removed and where they are moving towards a more advisory, fee-based model, like in the UK after the Retail Distribution Review for independent advisers. This will be a development for ETF distribution across Europe.

The US is a very different market, with one regulator, one currency, one market, but in Europe if you look back, we’ve made a lot of progress in many ways. For example, if you look at post-trade transparency, which was not there a few years ago.

We could do much more, of course, and the market is growing and developing. If you look at how the market grew in the US and in Europe, the trend here is a few years lagging. The retail market and pension schemes went from defined benefits to defined contribution, and people are increasingly money managing themselves with some self-directed management. This is having a significant impact. Asset growth is becoming broader from that point of view.

Backreedy – The retail market in the UK is very much IFA-driven, and those IFAs are predominantly in platforms – that’s where you find the sticking points and challenges.

The challenge lies with the technology behind the platforms because they can’t support fractional trading and ETFs, whereas they can support mutual funds. There’s a technological barrier, and a difference within continental Europe where the distribution channel is mainly with the banks and insurance companies, whereas within the UK, certainly for the retail investor, it’s via the platforms or direct to market when you’ve got the fund supermarkets, like the AJ Bells or the robo-platforms.

Sorel – The trading ecosystem is more of an issue than distribution. Everything we’re hearing is fractional trading, consolidated tape, harmonisation of the trading rules across multiple European exchanges – that’s what is needed to reach more investors.

If you’re a big insurance company and you make a sizeable OTC [over-the-counter] trade with your broker, you know what you’re going to get. If you’re a smaller investor investing a few hundred or thousand euros and you don’t know that you need to put a limit order, you could have a bad experience on certain platforms because the technology is not there to reach out as deep as it should.

Guthrie – The market is better at organically providing for people’s preferences rather than a top-down dictated structure, particularly by regulators. Fragmentation is where the real issue lies, where individual countries within Europe remain siloed and where exchanges have been monopolistic.

Not everyone is going to want the same thing, but the idea the IFA [independent financial adviser] market is still embedded in those platforms in funds because of fractional share-dealing has been a conversation for a decade, and it hasn’t been solved. It’s not going to be solved by somebody dictating something, but a better way of doing business is needed if people are to move away from that model.

If we can encourage innovation in the way the product set is distributed to the end investors, that’s more likely to lead to a positive outcome. But if we haven’t moved the needle in platform technology transition in the last seven to ten years, I doubt it’s going to happen in the next five.

Schmitz-Esser – Comparing the index mutual funds model to ETFs, the true challenge lies in the distribution of index mutual funds, because platforms for fund subscriptions are not harmonised at all and it’s difficult for many investors, especially retail investors, to subscribe or redeem mutual funds and index mutual funds. From a distribution point of view, exchanges provide wonderful platforms for ETF providers, but it’s a lot more difficult for index mutual funds. You see this with popular investor platforms. For example, if you look at, you will only find ETFs, as the name suggests, but there isn’t anything similar for index mutual funds.

Sorel – You also have to consider swing prices, dual pricing, midday NAV [net asset value], end-of-day NAV: you get into a whole new territory of fragmentation there.

Schmitz-Esser – With index mutual funds, you don’t have these problems, you can always trade at the closing price when markets are most liquid. You don’t have partial fills, but trading is not harmonised at all. I definitely see room for improvement in terms of accessibility to index mutual funds.

Garcia Puente – In Spain, the ETF market is about €40 billion and the mutual fund market is about €300 billion, so the difference is still huge. The ETF segment is growing in Spain but at a slower pace than we had thought a couple of years ago. This may have something to do with taxation, because in Spain mutual funds treatment is more friendly than ETFs, but the difference between both markets is huge despite ETFs being easier to trade than mutual funds for retail investors. Mutual funds have to be approved by platforms in order to subscribe or redeem the funds, and an ETF trades like a stock, it can be traded in any platform. Despite being easier to trade here in Spain, retail investors are more prone to mutual funds rather than ETFs because of taxation – an important issue right now.

Funds Europe – Although ETFs in Europe are flourishing, there is still a lack of ETF-specific rules. What other key issues do regulators need to address in order for the industry to grow further, and how can regulation be a hindrance? What are the other factors at play?

Guthrie – One of the big things that’s hindered the industry historically is that we are tagged on to the same treatment for other asset classes. It’s like fund regulation plus, or trade transparency – ‘we looked at equities and we’ll just do this little tack-on for ETFs’. If you have a look at the exchange-traded commodities market, it’s really embedded in this debt issuance model, but many features are not ETF-appropriate.

Backreedy – One of the things we find as users of ETFs is the perception that clients have around the product itself, whether the wrapper is inverse or leveraged and so forth. There does need to be that distinction, maybe through regulation. A lot of education around the wrapper is also needed.

Dzanis – It’s not only about understanding the structure, but the classification and clarification around the ETF, especially if we’re talking about usage and retail. Also, the other consideration is which distribution channels use what type of product, such as passive versus active. In addition to that, classification education is needed for investors to understand greater transparency on the total cost of ownership for better analytics and utilisation in portfolios.

Differences in marketing channels and regulation across Europe can affect the market literature, so people are going to consume the information on how to use them (and understand them) differently.

Shastry – There is an active dialogue between the ETF issuers, but also industry bodies and regulators, both at national level and regional or global regulators, including the European Commission, to look at whether any rules, including Ucits rules, need to be revisited again. A lot of clients globally prefer the Ucits framework which is very well recognised and standardised. The Efama [European Fund and Asset Management Association] task force is actively involved in discussions with many of the regulators. The Efama task force also wrote an educational paper last year to really highlight the different structures and key characteristics, which was very well received by regulators and industry participants.