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Supplements » ETF Report March 2022

ETFs roundtable: ESG has wound itself into ETFs

European Ucits-regulated ETFs are gaining sales outside of Europe. Why? Because they have good ESG credentials, thanks in part to the SFDR. Our ETF roundtable discusses ESG, distribution and other topics in the ETF market.


Daniel Cripps (Head of ETF Engineering, DWS)
Deborah Fuhr (Founder/managing partner, ETFGI)
Henry Odogwu (Head of UK institutional sales and managing director, iShares and BlackRock)
Olivier Paquier (Head of ETF distribution, JP Morgan Asset Management)
Rob Rushe (Senior expert, ETF solutions, Caceis)

Funds Europe – In Europe, including the UK, have exchange-traded funds (ETFs) achieved their distribution potential across the whole gamut of channels, from adviser and platform channels to larger and small institutional channels?

Rob Rushe, Caceis – No, but I think ETFs have managed to be extremely successful despite a lot of the challenges they’ve had on the distribution side and the difficulty there’s been to break into the mutual fund ecosystem.

This is especially the case in mainland Europe, given that Europe is dominated by institutional investors and mutual fund platforms In addition, there is the prevalence of retrocession fees and trailer fees in the mutual fund world that still exist today. There is still very much a closed ecosystem for mutual fund sellers, with a lot of vested interests in keeping it that way. But ETFs have done extremely well in competing with that ecosystem and I think that just speaks to how strong they are, that despite being largely hidden from mutual fund investors for a long time, ETFs have still managed to achieve the asset levels and success that they have.

ETF success is a story about access, and I think mutual funds are starting to learn these lessons as they see investors are voting with their feet. We’re seeing the crossover happen more and more – and as retrocession fees and trader fees get removed in more markets, we will see ETFs continue to grow on their success.

Deborah Fuhr, ETFGI – I would agree that we haven’t yet seen the full potential for ETFs in Europe when you compare them to other markets. In the US, online platforms have allowed all investors to trade ETFs and shares without paying commission. A level playing field like that would make a huge difference.

I do think though that we are seeing a significant benefit for Ucits ESG [environmental, social and governance] ETFs because I believe that the SFDR [Sustainable Finance Disclosure Regulation] classifications are helping investors in Latin America and Asia to embrace Ucits ETFs, where historically they’ve been embracing US-domiciled ETFs. There were record net inflows in January – €29 billion, the highest ever monthly inflow. ETFs are winning new users.

Henry Odogwu, BlackRock – If I look at the platforms individually in terms of segments, we’ve seen increased adoption, particularly by institutional investors, over the last 18 months who have used ETFs as building blocks in multi-asset portfolios. We are also now seeing pension funds use ETFs for the first time.

One of the developments which made them really good for this use case is the ease of access, for example with granular exposures, such as specific sectors and factors, e.g. energy, financials, quality and value. This is where there are advantages of ETFs over mutual funds in terms of ease of access and transparency, and the total cost of ownership of an ETF can also be lower.

Another area that’s been really interesting for us is around liquidity and cash management, so using ETFs as an all-purpose cash vehicle. So, as allocations to private markets increase, we’ve seen users of ETFs move their cash into them to reduce the cash drag on their portfolios.

Daniel Cripps, DWS – I agree largely with what’s been said, but I think we do have to put it in the context of the fact that 2021 was a record year for the ETF industry, with €160 billion of inflows and AuM [assets under management] reaching €1.24 trillion.

So, I think when we’re talking here about the challenges – and there definitely is still a long way to go – we also have to consider how massive the European ETP market is becoming now.

On the platform and the adviser side, as more platforms start to be able to facilitate things like factional share dealing, things will change, including platforms that are more rooted in the mutual fund business, where it has been a challenge for them to get up to speed with platform technology to allow intraday pricing.

Olivier Paquier, JP Morgan AM – In Europe we’ve observed a barbell approach: ETFs have been adopted by institutional investors and retail investors. We’ve seen, for example, asset owners expand and accelerate their ETF usage recently as they respond and adapt to market trends. Then, in terms of retail investors, many that formerly invested through an advisory business, or simply their bank, are increasingly switching to digital or packaged ETF offers.

Overall, the beauty of ETFs is that they fit in many configurations, and especially over the past two years when we saw the effects of the pandemic. ETFs have managed to thrive in this environment to offer investors, whether existing or new, something different and something that could enable them to consolidate their views through their portfolios.