ETF adoption across Europe is set to accelerate with industry assets on track to reach €1 trillion by 2020, according to findings by Morningstar’s European Passive Funds Research team. The report identifies regulatory changes, product innovation and an increasing preference for low-cost investment solutions as key drivers in meeting this target.
Hortense Bioy, Morningstar’s Director of Passive Funds Research.
Hortense Bioy, Director of Passive Funds Research at Morningstar, commented: “Morningstar has long been a proponent of low-cost funds of all stripes–including index mutual funds and ETFs–as one of the most effective tools to drive success for investors. We welcome the growth of passive investing and will continue to expand our research efforts in this area to assist investors in their fund selection process.”
The report found that AUM in European-domiciled ETFs has doubled over the past five years to approximately €550 billion at the end of December 2016 and are now at par with the longer-established market for traditional index funds.
Despite the strong growth, Morningstar believes European retail investors have yet to fully embrace ETFs, but distribution channels are slowly opening and incoming regulation like MiFID II should help. In the meantime, the growing popularity of robo-advisors has advanced the case for the use of ETFs by cost-wary retail investors.
Fixed-income ETFs have been a significant contributor to growth in the industry with market share increasing in each of the past five years, and now standing at over 24%, up from 16% in 2011. Morningstar notes that investors are embracing ETFs as a handy tool to gain exposure to fixed income in an environment where the traditional channels to access the asset class have been severely constrained by post-crisis bank regulation.
Strategic or ‘smart’ beta ETFs have also displayed growth above the industry average with AUM in strategic-beta ETFs quadrupling in four years to €43bn as at the end of 2016. Thematic exposures are also strongly in demand with a particular emphasis on socially responsible ETFs. In response providers are launching increasingly complex products to differentiate themselves while catering for this growing demand.
“The European ETF marketplace has seen tremendous growth in recent years, with expansion in the number of strategies on offer,” said Bioy. “Despite talk of consolidation, the number of providers and products is still rising. Strategic or ‘smart’ beta, environmental, social and governance (ESG) and thematic exposures are areas of focus for new product development, and as the product menu further broadens, so does complexity. This calls for renewed education efforts for professional and retail investors.”