Which way next for ETFs?
October 5, 2018

Which way next for exchange-traded funds (ETFs)? The way ahead looks promising, according to Rob Rushe, European ETF Segment Executive, BNY Mellon, speaking to www.globalcustody.net ahead of this week's Inside ETFs Europe conference. While new issue activity in 2018 to date has not matched the stellar levels recorded in 2017, the market has remained distinctly upbeat.

"We see strong interest from US fund houses in bringing their ETF funds and expertise to the European market," says Rushe. "And the traffic is not all one way. Some European managers are now launching US domiciled ETFs, despite the high branding and distribution barriers that European investment managers traditionally face in that market.

A recent pronouncement by the Central Bank of Ireland (Ireland is the domicile of the vast majority of European ETFs) on the thorny issue of transparency requirements can be expected to make waves, he observes.

The Central Bank of Ireland published a Feedback Statement on September 14 in relation to ETFs. The quality and depth of the stakeholder feedback reflected the substantial time and effort taken by market participants, said the Central Bank.

It highlighted a number of regulatory outcomes for Irish ETFs:

Different dealing times will be permitted for hedged and unhedged share classes within the same ETF; investment funds can establish both listed and unlisted share classes within a single fund structure, subject to disclosure requirements; and there will be no change in the requirement to have daily portfolio disclosure at this time.

On the one hand, suggests Rushe, the new details that will need to be disclosed by asset managers will likely discourage some active managers from moving into the ETF sector in a meaningful way. On the other hand, managers who have been mulling over the possibilities will likely welcome the new clarity that the Central Bank of Ireland has provided. Enabling the launch of an ETF share class from an existing fund could prove particularly interesting, says Rushe.

"There has been a noticeable shift amongst asset managers currently on the sidelines who realise they need to launch ETF products," continues Rushe. "Without naming names, I am aware of several larger firms that are actively considering moving into ETFs, some of whom you probably wouldn't expect."

The growing interest in the sector is borne out month after month by the figures compiled by ETFGI, a leading independent research and consultancy firm on trends in the global ETF/ETP ecosystem.

In one of its most recent regular bulletins, it reported that assets invested in ETFs and ETPs listed in the Europe gathered net inflows of US$2.96 billion during August 2018. Total assets increased to US$835 billion at the end of August 2018, up 0.91 percent from US$828 billion at the end of July, according to ETFGI's August 2018 Europe ETF and ETP industry landscape insights report, an annual paid-for research subscription service.  (All dollar values in USD unless otherwise noted.)

At the end of August 2018, the Europe ETF/ETP industry had 2,324 ETFs/ETPs, with 7,893 listings, from 67 providers on 26 exchanges. Due to net inflows and market moves the assets invested in ETFs/ETPs listed in the Europe increased by 0.91 percent, from $828 billion in July 2018 to $835 billion.

Equity-based ETFs/ETPs attracted the largest net inflows during August with $3.37 billion, bringing net inflows for 2018 to $27.90 billion, less than the $45.16 billion in net inflows at this point last year.

Fixed income ETFs/ETPs gathered net inflows of $615 million during August, bringing net inflows for 2018 to $9.20 billion, considerably less than the $22.12 billion in net inflows at this point last year.

Commodity-based ETFs/ETPs experienced net outflows of $860 million during August, bringing net inflows for 2018 to $2.62 billion, less than the $7.47 billion in net inflows at this point last year.

A high proportion of net inflows during August can be attributed to the top 20 ETFs by net new assets, which collectively gathered $4.93 billion. The Vanguard S&P 500 UCITS ETF (VUSA LN) saw net inflows of $678 million, the largest in August, ETFGI reported.

The evolution that is unfolding in this niche in the investment management world inevitably presents new challenges to the fund managers themselves and to the suppliers of the underlying services, technology and accumulated knowledge and experience that are essential to success.

These new market entrants and fund launches are making it increasingly hard to find people with the right level of experience and expertise, states Rushe. Faced with this squeeze on ETF talent, asset managers are frequently turning to external service providers.

A trend also identified by Rushe as one to which is the consolidation of trading exchanges for ETFs. "With 23 exchanges currently across Europe, there are a number of competitors looking to be the one-stop shop for ETFs," he comments.

As we asked at the start of this article, which way next, then, for ETFs? Education, hand-holding by experienced service providers and mutually beneficial strategic and operational partnerships will form a large part of the short-, medium- and long-term answer.





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Which way next for exchange-traded funds (ETFs)? The way ahead looks promising, according to Rob Rushe, European ETF Segment Executive, BNY Mellon, speaking to www.globalcustody.net ahead of this week's Inside ETFs Europe conference. While new issue activity in 2018 to date has not matched the stellar levels recorded in 2017, the market has remained distinctly upbeat.

"We see strong interest from US fund houses in bringing their ETF funds and expertise to the European market," says Rushe. "And the traffic is not all one way. Some European managers are now launching US domiciled ETFs, despite the high branding and distribution barriers that European investment managers traditionally face in that market.

A recent pronouncement by the Central Bank of Ireland (Ireland is the domicile of the vast majority of European ETFs) on the thorny issue of transparency requirements can be expected to make waves, he observes.

The Central Bank of Ireland published a Feedback Statement on September 14 in relation to ETFs. The quality and depth of the stakeholder feedback reflected the substantial time and effort taken by market participants, said the Central Bank.

It highlighted a number of regulatory outcomes for Irish ETFs:

Different dealing times will be permitted for hedged and unhedged share classes within the same ETF; investment funds can establish both listed and unlisted share classes within a single fund structure, subject to disclosure requirements; and there will be no change in the requirement to have daily portfolio disclosure at this time.

On the one hand, suggests Rushe, the new details that will need to be disclosed by asset managers will likely discourage some active managers from moving into the ETF sector in a meaningful way. On the other hand, managers who have been mulling over the possibilities will likely welcome the new clarity that the Central Bank of Ireland has provided. Enabling the launch of an ETF share class from an existing fund could prove particularly interesting, says Rushe.

"There has been a noticeable shift amongst asset managers currently on the sidelines who realise they need to launch ETF products," continues Rushe. "Without naming names, I am aware of several larger firms that are actively considering moving into ETFs, some of whom you probably wouldn't expect."

The growing interest in the sector is borne out month after month by the figures compiled by ETFGI, a leading independent research and consultancy firm on trends in the global ETF/ETP ecosystem.

In one of its most recent regular bulletins, it reported that assets invested in ETFs and ETPs listed in the Europe gathered net inflows of US$2.96 billion during August 2018. Total assets increased to US$835 billion at the end of August 2018, up 0.91 percent from US$828 billion at the end of July, according to ETFGI's August 2018 Europe ETF and ETP industry landscape insights report, an annual paid-for research subscription service.  (All dollar values in USD unless otherwise noted.)

At the end of August 2018, the Europe ETF/ETP industry had 2,324 ETFs/ETPs, with 7,893 listings, from 67 providers on 26 exchanges. Due to net inflows and market moves the assets invested in ETFs/ETPs listed in the Europe increased by 0.91 percent, from $828 billion in July 2018 to $835 billion.

Equity-based ETFs/ETPs attracted the largest net inflows during August with $3.37 billion, bringing net inflows for 2018 to $27.90 billion, less than the $45.16 billion in net inflows at this point last year.

Fixed income ETFs/ETPs gathered net inflows of $615 million during August, bringing net inflows for 2018 to $9.20 billion, considerably less than the $22.12 billion in net inflows at this point last year.

Commodity-based ETFs/ETPs experienced net outflows of $860 million during August, bringing net inflows for 2018 to $2.62 billion, less than the $7.47 billion in net inflows at this point last year.

A high proportion of net inflows during August can be attributed to the top 20 ETFs by net new assets, which collectively gathered $4.93 billion. The Vanguard S&P 500 UCITS ETF (VUSA LN) saw net inflows of $678 million, the largest in August, ETFGI reported.

The evolution that is unfolding in this niche in the investment management world inevitably presents new challenges to the fund managers themselves and to the suppliers of the underlying services, technology and accumulated knowledge and experience that are essential to success.

These new market entrants and fund launches are making it increasingly hard to find people with the right level of experience and expertise, states Rushe. Faced with this squeeze on ETF talent, asset managers are frequently turning to external service providers.

A trend also identified by Rushe as one to which is the consolidation of trading exchanges for ETFs. "With 23 exchanges currently across Europe, there are a number of competitors looking to be the one-stop shop for ETFs," he comments.

As we asked at the start of this article, which way next, then, for ETFs? Education, hand-holding by experienced service providers and mutually beneficial strategic and operational partnerships will form a large part of the short-, medium- and long-term answer.




More on:  Asset management