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Magazine Issues » October 2020

ETF roundtable: Passing the pandemic litmus test

Funds Europe – Millennial investors have generally shown themselves to be more engaged than ever with their investments during the Covid-19 crisis. Have ETFs emerged as the vehicle of choice for these investors? And, in general, have ETFs yet been adopted widescale by institutional investors?

Baron – In Europe, the vast majority of users tend to be on the institutional side, as opposed to what we see in the US where the take-up of ETFs has been mainly from the retail spectrum. This is due to the following: the tax element or the tax advantage that ETFs have in the US, which we don’t have on the Ucits side. This is also due to the fact that we see many markets in Europe still retrocessions-driven whereas in the US, the model has been moved to a fee-based one many years ago.

Millennials are going to be major players in the adoption of ETFs going forward. It will take some time, because those millennials are not major players now, but they will be ultimately. If we look at surveys of millennial behaviours, they tend to go for simple solutions. They want low fees, so there is a big focus on cost from that angle. They also want something that is easy to understand and is transparent, so all of these attributes play really well to using ETFs.

That said, there’s much more education needed to be done from the industry and regulatory perspectives.

Guthrie – One of the other big differences between the US and Europe is the investing mentality. In the US, retail is very trading-focused. That doesn’t really happen here, it’s a much more intermediated market. Even today, if you look at the FTSE 100 or anything listed on the LSE, it’s around 12% direct retail ownership. A lot of these digital solutions for helping people manage their wealth are going to increasingly gain in popularity as we see that millennial group come into their own financially. What we have seen is increased pressure on fees which naturally move people towards ETFs.

Mahmood – There’s a huge misconception that ETFs are only appealing to millennials. However, we see significant engagement from our older clients.

One of the main reasons why we haven’t seen a faster adoption of ETFs from retail investors in Europe is because of accessibility. One of the easiest ways to open up access to ETFs is through platforms. However, most platforms are only just starting to build the capability to offer ETFs. Another reason is because of the protection of old-school business models, particularly in Europe. Firms are reluctant to give up their revenue streams and to move people into lower-fee, more transparent products.

Garcia-Zarate – Perhaps millennials don’t have the money to invest now, but what they’re doing is moving away from the classic channels of distribution. They don’t rely on high street banks anymore, everything is online, and so that basically is potentially laying the ground for an increase in the usage of ETFs by retail investors whenever they do have the money to invest in those things. I would add that perhaps millennials have contributed to furthering the agenda of product development in things like ESG. When you talk to older investors, they don’t necessarily always care that much about the environment, so kudos to the young generation for pushing the green investing agenda, among other things. They may not have the money to invest right now, but at least they’re pushing people to come up with solutions and investment products that resonate more with the transition to a greener economy.

Guignard – There may also be a kind of misconception when we say that in Europe, retail clients don’t use ETFs. They don’t use ETFs directly, mainly because they don’t manage their retirement money directly, but in their schemes, there are a lot of ETFs, actually – they’re indirectly exposed to ETFs through funds of funds, pensions or insurance wrappers.

There is no barrier for retail clients in Europe to directly buy ETFs today. Any one of us can do it very easily. The reason many retail clients don’t do it may be educational. Retail clients in Europe need advisory on their allocation, and that’s why the development of ETFs towards those retail clients is indirect and through ETF-based solutions.

Shah – Post-Covid, retail clients’ perception has changed. When the previous financial crisis happened, most millennials probably didn’t have enough money to invest. Now, ten to 12 years down the line, there is certainly wealth being allocated that was created within that period. However, large volatility and the sharp falls in the markets and share prices may have spooked some millennials.

There are so many broader aspects which ETFs have brought, and investors have seen that they are generally less volatile and good diversifiers. Investors want to manage their money better because with falling state pensions, there is certainly a need even in Europe to manage one’s own pension and investments.