In a recent article for Finance Dublin, Lisa Kealy, Exchange-Traded Funds (ETFs) Solution Leader, discussed the future of ETFs in Europe, and the role Ireland will play as the domicile of choice for European ETFs.
European ETFs have experienced remarkable growth over recent years. This performance now appears to be attracting a fresh wave of investment in the industry. The past few months have seen five promoters announce strategic investments in Europe, four of which are US players. Wisdom Tree plans to acquire boutique firm Boost, and Warburg Pincus has purchased a strategic stake in Source, another specialist. We have also seen JPM, First Trust and L&G announce entry plans for the European ETF market. These deals suggest that growth in European ETF assets, which reached 20 per cent during 2013, could gain even more momentum during 2014 and beyond.
Dublin is well placed to capture a leading share of this business, particularly given it is already the leading European domicile for ETFs, administering 32 per cent of all European ETFs. Most important promoters, including market leader BlackRock, already domicile and administer many of their funds here. And the good news is set to continue, according to EY’s recent survey of the Global ETF landscape, entitled A new era of growth and innovation, with 66 per cent of global participants stating that Ireland was their domicile of choice within Europe.
It is an exciting prospect. But is it safe to assume that European ETFs will continue to expand, and that Dublin will be able to help itself to a growing slice of the pie? Or do these predictions contain a hint of complacency? The outlook for Europe is not all optimistic. EY’s survey suggests that a range of obstacles could prevent the European industry from fulfilling its full potential. At a practical level, these include the growing complexity of European regulation and the advent of the Financial Transactions Tax (FTT). A more far-reaching challenge is the need to encourage retail demand for ETFs. This will require a combination of regulatory, distribution and cultural changes. Above all, the European industry needs to improve cross-border transparency and liquidity. In time, EU initiatives such as T2S and MiFID II should help, but BlackRock’s partnership with Euroclear suggests that firms are keen to force the pace of change.
Leading European promoters are in no doubt about the potential growth of ETF assets. Many predict European ETFs will continue to expand at 15 per cent – 20 per cent per year. ETFs are expected to take market share from other passively managed products, and to gain ground with a range of institutional investors. Innovation is another major driver of growth. European promoters are investing heavily to develop new products, enter new markets and offer new services to investors.
The decisions by Wisdom Tree and Warburg Pincus to follow US firms like State Street and Vanguard into Europe are a clear vote of confidence for this assessment. Recent press reports suggest that two other promoters could soon follow. In future, a combination of consolidation and organic growth could even allow these new arrivals to threaten Europe’s current leading players.
And what about Ireland?
In a European context, there is no question that Ireland starts in pole position. Ireland retains a reputation for high quality regulation and world-class levels of service. The very first European ETF was domiciled here, and the recent launch of Europe’s first China ‘A’ shares ETF shows that Dublin remains a hub for innovation. Our network of tax treaties is another advantage. In particular, the US treaty has helped to build a strong investor base by giving Irish ETFs an advantage over Luxembourg funds. Two thirds of our survey respondents identify Ireland as the domicile of choice in Europe.
For Dublin, the challenge now is to avoid complacency. If promoters are to continue to favour Ireland, then existing levels of support and service need to be improved, not just maintained. ETF administrators need to create value for promoters by widening and enhancing the services they offer. Many promoters would welcome a wider range of middle office support, as well as help with evolving regulatory and tax requirements. EY’s ETF Survey A new era of growth and innovation shows that service providers need to do more to support innovation. This is not just about new products. Promoters want administrators to help improve their interface with investors and – just as importantly – with the market makers that dominate ETF trading and also take on more middle office functions.
Continued investment is the key here. Service providers that develop their systems and expertise will be able to meet promoters’ evolving requirements, expand in scale and deliver a high quality, low cost service. Equally importantly, Ireland’s other ETF professionals – the accountants, lawyers and bankers – need to focus on their own ability to deliver the support and advice that promoters are looking for.
Global ETF funds have the potential to surpass total hedge fund assets during the next 18 to 24 months. ETFs are a unique product, with a potentially huge role to play in the recovering European economy. Ireland needs to ensure it remains well placed to support and share in this growth.