Institutional investors dominate the European exchange-traded fund market. However, there is a growing business on the retail side, according to the biggest U.S. providers, and they are increasingly targeting this space.
The U.S. and European markets “are very different in terms of client base,” says Hortense Bioy, director of passive strategies and research manager at the European branch of Morningstar. Exact figures are not available, Bioy says, but it is estimated that while retail and institutional investors divide the U.S. ETF market between themselves roughly equally, it is about 80/20 in favor of institutional buyers in Europe.
That difference is illustrated by Vanguard’s position in both markets. The firm is synonymous with low-cost products aimed primarily at retail investors, and is the second-largest player in the U.S.—behind only BlackRock’s iShares unit—in terms of assets under management.
Vanguard’s European presence is much smaller, but its product range is growing quickly, says Mark Fitzgerald, head of the company’s equity product management in Europe.
Vanguard has had a European base since 1998, but only launched its first ETF there in 2012. It now markets 23 ETFs to European investors, from products that track the S&P 500 and FTSE 100 indexes to “building block” funds that provide access to baskets of stocks in specific countries and regions, such as Japan and North America. The firm is planning to launch several new products in the coming year, including some fixed-income ETFs.
Fitzgerald thinks the overall European ETF market could double or even triple by AUM over the next five years, with individuals taking an increasing slice of that pie. The rise of the European retail investor “is not so much a matter of ‘if’ as ‘when,’” he says.
Several factors could drive Europe’s retail market in the coming years, Fitzgerald says. Individual investors are more prevalent in the U.S., he says, because American investors have “known for a long time that they have to take charge of their retirement and their long-term savings.”
This is increasingly the case in Europe, too. For example, he points to a move towards defined contribution plans in the U.K. Unlike defined benefit pensions, DC plans have no guaranteed pay-off, so their value can change over time depending on the success of the underlying investments. People with DC plans therefore need a greater awareness of their portfolio.
Additionally, today’s low-yield environment brings a greater emphasis on costs, which could draw attention to ETFs.
“Since the global financial crisis, all types of investors—whether they’re very sophisticated institutions or the person on the street—have sought to find products that are lower cost, easier to understand, lower risk, and more transparent,’ Fitzgerald says.
But while the retail side is growing in Europe, Fitzgerald notes there are still key differences with the U.S. For example, far fewer European individual investors buy funds directly, choosing instead to go through financial advisors. Among the reasons is that there are fewer online platforms in Europe that market ETFs to individuals, though this is changing.
“You have to find other means to get to your end clients, whether that’s through advisors or discretionary fund managers or wealth managers,” he says. “In the U.S., a big provider like Vanguard has ways to disseminate its products much more directly to a retail investor.’
BlackRock is the largest ETF provider by AUM on both sides of the pond. The company is increasingly targeting the retail side of the European market, says Patrick Mattar, head of iShares EMEA Capital Markets at BlackRock.
“We are starting to see a notable increase in demand from European retail investors, who are shifting to simpler and more cost-efficient investment products,” he says. “ETFs are certainly no longer just seen as products for institutions.”