Share page with AddThis

Supplements » ETF Report March 2021

ETFs: Against a complicated backdrop


Chris Gannatti, Head of research, Europe, WisdomTree

Cyber security could be the quintessential megatrend from 2020 to 2030. Governments have been waking up to the power that the utilisation of this data can imply, and the regulatory environment is changing. Additionally, data breaches at a company level have become high-profile, global news.

To operate a business today, it is not a choice to have a cyber-security strategy – it is a necessity. Certain areas in cyber security, like cloud security, could grow at roughly 30% per year over the coming five years, from an admittedly lower baseline level. Other areas in cyber security could grow as technologies like 5G and the Internet of Things take hold, as it is possible that there will soon be more than 50 billion connected devices globally.

In our view, the biggest risk could be the global fragmentation of the cyber-security market. Logically, China may want its own companies and strategy in this space, and these companies may be separated from those in the Western world. Of course, uncertainty in government policies globally could create a delicate balance between obstacles and opportunities.

Stephane_DegrooteA KEY GROWTH SECTOR

Stéphane Degroote, Managing director, head of ETFs and derivatives business EMEA, FTSE Russell

The growing demand for ETFs reflects their ability to cater for a wide variety of investment objectives and risk profiles in a cost-effective manner. This flexibility is a key reason why financial advisers and portfolio managers employ ETFs in the construction of portfolios sometimes alongside active strategies.

As the ETF market and passive investment strategies continue to grow in popularity, innovation is key to providing investors with choice and diversification suited to their portfolios and evolving strategies. We have seen a wide range of ETF products across assets classes and geographies list in London over the past 12 months, including access to some of the most liquid US equities and North American midstream energy infrastructure, and exposure to thematic assets such as ESG and digital infrastructure.

One of the key sectors of growth has come from ESG. Both institutional and private asset owners are increasingly including climate objectives in their decision-making and are adjusting equity and fixed income portfolios based on climate considerations. We expect demand for ESG considerations to continue through 2021.


David Walsh, Partner, Dillon Eustace

Assets in European ETFs broke through the €1 trillion mark at the beginning of 2021, reaching an all-time high. 2020 was also an historic year in the US following a significant rise in the assets under management and cash flows into active ETFs, but also due to the Securities and Exchange Commission (SEC) decision to give the green light to new models of ‘non-transparent’ ETFs, with a number of managers launching active equity ETFs. ‘Non-transparent’ active ETFs do not provide the market with full daily transparency in relation to the ETF’s holdings, or the relevant weightings, and are favoured by managers concerned with front-running of their trades.

In Europe, managers are still to disclose their portfolio holdings daily, which continues to act as a barrier to launching active equity ETFs. There has been little development seeking to bring ‘non-transparent’ active products to market when compared to the US. This is predominantly due to the regulatory framework and the fragmented listing requirements which differ slightly in several jurisdictions.

While Ireland continues to be at the vanguard of developments in the European ETF industry, the current position of the Central Bank of Ireland (CBI) remains that it “will not authorise an ETF, including an active ETF, unless arrangements are put in place to ensure that information is provided on a daily basis regarding the identities and quantities of portfolio holdings” and requiring that the offering documentation “disclose the policy regarding portfolio transparency including where information on the portfolio may be obtained”.

There is hope that the CBI may be persuaded to examine and approve ‘non-transparent’ models such as those approved by the SEC. However, challenges around fragmentation will remain a point of contention to also be addressed.