ETFs in the UK and Europe: Drivers and blockers of appeal among fund distributors

By: Mark McFee

06/08/2024

We recently touched on the subject of quantifying exchange-traded fund (ETF) usage among European professional investors, but that only provides part of the puzzle when it comes to judging the market opportunity and future appetite for ETFs. Another important piece is understanding perceptions of these funds, and any factors that could be driving or blocking their uptake.

Clarity on these aspects of the ETF industry is emerging from several of our ongoing research studies. The UK Adviser Study (UKAS), which analyses the views of almost 300 UK investment advisers and discretionary fund managers / wealth managers every quarter, included a topical ETF section in Q1 this year, shining a light on what these fund distributors think about ETFs.

Firstly, it is clear that usage of ETFs has been steadily trending upwards among professional retail investors in the UK, with the average amount of business written doubling, from 4% in late 2017 to 8% at the beginning of this year. DFMs do notably more business in ETFs than investment advisers and are much more likely to be using them in the first place – only around one fifth of DFMs report doing no business in ETFs, in contrast to just over half of investment advisers doing none.

Survey respondents provide a variety of thoughts on their usage – or avoidance – of ETFs. For proponents, low costs are a driver mentioned by several, while access to specific opportunities or themes is another.

“We do buy some treasury or gilt ETFs because it’s a very cheap way of getting exposure to the duration bets that you want.” DFM, UK

“[ETFs] have a valid place in portfolios, in areas you’re trying to access, whether it’s a theme or something specific to an idea or bigger macro trend.” DFM, UK

Those who are less enthused about ETFs attribute this to a number of reasons, including an inability to access them via platforms, no tax advantages like those available in the US when investing in ETFs, and, especially among investment advisers, relatively low awareness of ETFs’ benefits, alongside resistance to using them due to compliance issues, or simply satisfaction with mutual funds instead.

“For model portfolios, we can basically only use index-tracking funds because some of the platforms prevent you from using ETFs.” DFM, UK

“If I wanted to use an ETF, I would have to justify why. There’s a lot of hoops that I have to jump through to be able to recommend that to a client. A reason I don’t use them is simply… the amount of additional due diligence I would have to do.” IA, UK

“The reality is we have a long-standing portfolio of investments. I don’t think we would make the flip to ETFs… I think there are a couple of regulatory issues to using them… If it’s not broke, don’t fix it.” IA, UK

It’s not just in the UK where the question of costs is shaping opinion on ETFs. Qualitative research interviews conducted by Research in Finance with intermediaries in France, Germany, Italy and Switzerland in Q4 2023 yielded several spontaneous mentions of ETFs, with costs or charges often central to these. An important distinction between many European markets and the UK is that commission payments can still be paid unless a distributor claims to be providing independent advice, which can create compatibility issues when it comes to offering ETFs.

“We are looking to offer ETFs in future, but the problem is that we run on retrocessions, and we’d have to charge very low fees to sell ETFs, which doesn’t currently fit with our business model.” Private Banker, France

“Clients are becoming better informed about costs, and so we’ll continue to see a rotation out of active funds into index trackers and ETFs.” IA, Germany

All of these comments help paint a picture of professional investor attitudes towards ETFs across the region, but it is important to test these at a quantitative level to be certain about the weightiest perceived advantages, disadvantages, drivers, and blockers. Research in Finance is launching a new stakeholder study on pan-European ETF appetite later in Q3 this year, surveying hundreds of intermediaries in eight markets, on these topics and many more.

If your business could benefit from a deeper dive on European retail/wholesale appetite for ETFs, please get in touch to discuss this study and we’ll be delighted to assist you.