The ETF Journey to Europe

The ETF Journey to Europe

Exchange-traded funds (ETFs) have been dominating investment conversations in Europe recently, and for good reason. After launching onto the scene in 1990 in Canada and 1993 in the US, ETFs have been a centre of innovation for more than two decades in Europe. 

There is serious potential for the growth of ETFs in Europe. According to Morningstar , as of December 31 2023, 26.7% of total assets under management in Europe were attributable to passive strategies including open-ended funds and ETFs, which has more than doubled in the last ten years, when the passive market share was 12.3%. 

On 11 April 2000, the first two European exchange-traded funds based on the Euro Stoxx 50 and the Stoxx Europe 50 were listed on Deutsche Boerse in Germany. In 2001, State Street Global Advisors launched the first European sector ETFs, enabling European investors to speculate on the different sectors of the MSCI Europe for the first time by overweighting or underweighting specific sectors in their portfolios. 

The formative years of the European ETF market were dominated by players with European HQs such as Lyxor (now Amundi ) in France, Barclays Investment Bank (formerly Barclays Global Investment) in the UK, DWS Group in Germany, and UBS Asset Management in Switzerland. These four organisations initially entered their local markets, gaining significant assets under management (AuM) from local investors. Their in-house distribution teams also played a key role in raising additional assets. 

Today, these issuers are still the biggest players within the European ETF market, but the landscape has evolved massively in the last twenty years to include the entrance of major asset managers headquartered outside of Europe. 

What are ETFs and what kind of ETFs are there?

An ETF is a pooled investment security that can be bought and sold like an individual stock through a brokerage firm on a stock exchange. ETFs can be offered on essentially every asset class from traditional investments to commodities or currencies, and can be structured to track anything from the price of a commodity to a large and diverse collection of securities. 

Fidelity Investments explains that unlike a company stock, the number of shares outstanding of an ETF can change daily because of the continuous creation of new shares and the redemption of existing shares. The ability of an ETF to issue and redeem shares on an ongoing basis keeps the market price of ETFs in line with their underlying securities. 

ETFs in Europe Today

The major players in the European ETF market have been so dominant that it has been difficult for global investors to disrupt the space. For US giants, the easiest route has been through acquisition, with BlackRock’s 2009 purchase of BGI and its iShares business - the ‘deal of the decade’ - being a prime example. 

Buffer ETFs have not taken off in Europe the same way they have in the US since they entered the market in 2018, amassing less than $190m assets since debuting in Europe four years ago. Despite this slow progress, this year’s Brown Brothers Harriman global ETF investor survey has found that at present, European investors find buffer ETFs to be the most interesting ETF strategy amid current market uncertainty.  

Some 37% of the survey’s European respondents said they were interested in the asset class followed by multi-asset (30%) and cryptocurrencies (26%). Defined outcome ETFs have been keeping a lower profile in Europe, likely due to a lack of familiarity with their structure in investors, and strong competition with other fund structures. 

Active ETFs have been playing a role in recent conversations too. The Financial Times reporting in March that active ETFs were set to storm mutual funds, while ETF Stream has recently written about how active ETFs may struggle to succeed in Europe due to structural barriers like transparency and capacity issues. 

At the end of June 2023, European equity ETFs held for the first time more than €1 trillion in assets under management - a remarkable feat considering the whole European ETF industry passed the €1 trillion in assets under management mark only 18 months earlier. 

There is still untapped potential for the diverse kinds of ETFs in Europe provided investors are fully educated on ETFs like they are with other investment strategies, as the European financial landscape continues to evolve and undergo regulatory and institutional change.

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