Innovation is top attraction for European ETF investors, finds survey

Oct 7th, 2016 | By | Category: ETF and Index News

Product innovation is thought to be a core aspect of the future evolution of the exchange-traded fund industry, according to a recent survey by ETF custodian and administrator Brown Brothers Harriman, together with events organiser Inside ETFs.

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Andrew Craswell, Vice President and Head of European ETF Business Development at Brown Brothers Harriman.

The 2016 European Investor Survey on ETF product and distribution strategies sought the opinions of 180 respondents, including independent financial advisors, banking and insurance professionals, mutual fund managers and hedge fund managers, collectively representing over €3.8tn in global assets.

“In recent years, ETFs have enjoyed significant growth and are quickly becoming a sizeable portion of the overall global mutual fund market,” said Andrew Craswell, Vice President and Head of European ETF Business Development at Brown Brothers Harriman.

“As European ETF AUM sets to pass $550bn, the market is poised for a period of accelerated growth as new entrants come in and the market surpasses a point of scale. With the pace of demand set to increase, the European ETF market will remain a key strategic focus for many of the world’s largest asset managers.”

The report showed that respondents overwhelmingly expect increased usage of ETFs with 97% saying they predict to either increase or maintain their current proportion of ETF assets relative to their entire portfolio.

However, the survey also found that participants expect this increased demand to come from non-traditional ETFs. Traditionally, investors have used core index products in their portfolios, but participant responses show a greater interest in differentiated ETFs, particularly smart beta factor-weighted strategies, socially responsible investment strategies (also known as ESG), and multi-asset investing products.

The report showed that, although still a relatively small part of existing portfolios, smart beta is gaining traction among investors: 78% of respondents have less than 5% of their portfolio in smart beta, yet 49% view it as an alternative to active strategies. Additionally, 69% of respondents advised that they would either increase or maintain their exposure to smart beta ETFs in the next year. This represents a 4.5% increase since 2015.

Socially responsible ETFs are en vogue: 52% of respondents consider environmental, social and governance (ESG) factors when making a new investment.

When asked which strategies would most appeal to participants as underlying an actively managed ETF, multi-asset strategies received 30% of the vote, followed by corporate fixed income (15%) and developed market equity (14%). Active ETFs were not for everyone, however, with 22% of respondents indicating they were not interested in the products.

These results suggest a new wave of growth is likely to come from smart beta and active ETFs as advisors look for excess returns in Europe.

“This year’s survey confirms that the demand for new ideas in the ETF space is accelerating,” noted Matt Hougan, Chief Executive Officer of Inside ETFs. “Investors are looking ahead to a market characterized by the potential for both higher volatility and lower returns, and they are demanding more out of ETF product development to solve those challenges. It’s an exciting time for the market.”

In terms of criteria that investors consider when analysing ETFs, 68% of those in the survey will invest in an ETF with a track record of less than 1 year but only 20% of respondents will invest in an ETF with less than €50m in assets under management.

Furthermore, 54% of respondents believe that robo-advisors will not hurt traditional financial advisors but will serve as an opportunity for their businesses.

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