Many UK IFA platforms lack the tech to support exchange-traded funds. More widely, European fund management firms could face a deluge of liabilities over ESG labels. Our ETF roundtable raised these and other issues.

Mark Northway (Investment manager, Sparrows Capital)
Darek Wojnar (Executive vice president, head of funds and managed accounts, Northern Trust AM)
Stuart Forbes (Co-founder, Rize ETF)
Morgane Delledonne (Head of investment strategy for Europe, Global X ETFs)

Funds Europe – Are ETFs now in an environment where active fees are more competitive and active investment is more highly regarded?

Darek Wojnar, Northern Trust – ETFs are wrappers comprising a number of securities that deliver investment strategies. On the one hand, it is an investment portfolio. On the other hand, it is a security that increases visibility and transparency to investors.

Through this visibility and transparency, ETFs encourage greater scrutiny compared to active fees. Transparency also makes it easier for investors to determine an ETF’s characteristics and value by putting pressure on active asset managers that are not delivering the value investors expect.

Morgane Delledonne, Global X ETFs – Historically, ETFs have helped raise investors’ awareness about the fees impacting long-term performance. However, ETFs haven’t encouraged healthy competition in the market, especially in market segments such as US equities, where generating alpha is complicated. That may change as we enter a new phase in the ETF market with more sophisticated strategies that help facilitate healthy competition. 

Niche markets can also be targeted by systematic investing and rules-based approaches. There is still space for active and passive investment, even in niche markets. For example, in the thematic space, you can have two strategies targeting the same theme but with different risk profiles. If you want to target the beta of a theme, then a large-cap index – which tracks companies with market capitalisation of over $10 billion – may be more desirable for the active manager. 

Meanwhile, some active managers may take a concentrated approach and focus on a small-cap index – which tracks companies with less than $2 billion in market capitalisation – in a particular theme. But this is largely dependent on an investor’s risk profile.

It is healthy to have both large and small caps in a portfolio. On a macro level, it is better to have a rules-based benchmark for the fees for one specific strategy because it helps anchor the fees for the industry as a whole. 

Funds Europe – Traditional index funds have had a strong hold over institutional investors in the UK. Have ETFs been neglected here?

Stuart Forbes, Rize ETF – There are differences between Europe and the UK in terms of investment culture and preferences for certain types of strategies, such as active over passive. From a technological perspective, the UK is slightly behind the curve compared with Europe in terms of its investment platforms, for example. Many of the traditional UK platforms lack the technological capacity to integrate ETFs, whereas many European platforms have achieved this integration already. Accordingly, ETF penetration amongst the IFA market in the UK is low. So, the lack of enhanced technology is limiting the target market in the UK. This will improve over time, however, as UK platforms invest in their technological infrastructure. 

Delledonne – In the institutional world, the focus on ETFs is usually around ‘plain vanilla’ exposures to help with cash management. But now, there is a growing segment in the retail space, as asset managers use ETFs and strategies differently due to pressure coming from individual investors. These investors seek exposure to certain areas of the market where they feel underexposed or underinvested.  

In terms of benchmarking the fees for the strategies, ETFs are very transparent. This gives the end investor clarity on the type of exposure they have, including costs. The ETF world is quicker to innovate than the traditional mature fund world. New investment exposures, such as option-based strategies, are democratising these tools for a broader range of investors, including those in the UK.

Mark Northway, Sparrows Capital – We are seeing less resistance from asset managers towards ETFs in the UK now. One of the main drivers for this is ETFs’ vast product range. Asset managers have a natural preference to use ETFs due to the innovation happening in this space.