The investment industry is not short of data showing investment managers clamouring for ways to generate profit from exchange traded funds (ETFs), a product that, in its passive form, continues to see record inflows and be shown as foundational to investors’ strategies, with roots in the commingled index funds first mass marketed in the ‘90s. ETFs tout their low cost, high transparency and ability to provide immediate access to securities markets for all types of investors.
European investment managers have seen large US houses dominate the passive ETF market, with asset concentration in the “Magnificent 7” being essential to the success of a multitude of investment strategies in recent years. However, this has not stopped European managers from being successful in the ETF sector, nor has it stopped their investors from pestering their managers to make up their mind s as to what to do regarding ETFs. Regardless, it’s clear a degree of consensus has been reached regarding investor demand for ETFs and managers’ views on what to do about it:
Given the interest, activity, and obvious growth in ETF inflows, European investment managers have an immediate opportunity to go beyond “taking a look at” ETFs and instead decide how to engage the clients that want them.
Making the Right Approach into ETF Products
The options for entering the ETF market in Europe find managers spoilt for choice, but a coherent product strategy and client demand must remain key determinants in the firm’s decision on how move into the ETF market. Though decidedly outpaced by the number of ETF launches, over 100 European ETFs closed in 2024 with lack of investor interest, insufficient AUM, or the manager’s inability to run the ETF profitably being likely culprits—despite the sustained investor appetite for ETFs. Thus, a considered and well-executed strategy and launch plan, securing sufficient AUM and delivering on demand from a broad client base are essential components of entering the European ETF marketplace.
Product structures can vary widely, with recent trends in white-labelling and ETF share class launches becoming prevalent. However, firms should not ignore potential tax advantages for Irish registries investing in US assets, so EU-based ETF share classes of a fund registered elsewhere could find themselves at an unnecessary disadvantage. White-labelling is also not entirely future-proof, as white-labellers, though they can assist in getting a product to market quickly, may be slow to raise assets through distributors. Further, current clients could see the arrangement as confusing, lacking commitment, and chiefly advantageous to industry middlemen.
Specialised ETF capability on the part of fund administration service providers, as well as professional services in legal and regulatory areas, are both essential and easily sought out. Fintechs and administrators can connect managers to large networks of authorised participants that bring the necessary liquidity to the product, delivering on promises of real-time market access to clients. Many law firms in favourable jurisdictions, specifically Ireland, have established themselves as “go-to” providers for new ETF market entrants.
Most important is the launch, consolidation, and growth of a product that is suited to the manager and investors over the long term. Once the manager commits to the sector, minor delays in time-to-launch are undoubtedly forgiven for a transparent, easily accessible, cost effective, and well-performing ETF.
Own Your ETF Capabilities
The ETF business requires both integration with core functions and specialised ETF market knowledge. Though a highly qualified, experienced ETF sales team can quickly ramp up momentum for market entry, there is a risk of contrasting approaches to sales, transaction management, and client relations within the same firm. An ETF can make the onboarding of a wholesale client faster and easier but also bypasses some of the more genteel aspects of client acquisition and relationship management that can assist greatly in retention and ability to upsell.
Indeed, ETFs can be at the core of investment strategy implementation, serving as a transparent, real-time “model” portfolio that is truly invested in the market. There remain some reservations in the industry regarding “cannibalisation” of assets, referring to the flight of investors from conventional retail and institutional products to ETFs. However, if ETFs offer cost advantages at scale and further client benefits can be demonstrated in terms of market accessibility and transparency, retaining assets may prove difficult if a manager is perceived as inflexible in its product strategy.
Scale Remains Key to Successful ETF Products
Scale and automation remain key drivers in keeping down costs. There are disparate views on exactly what the minimum AUM of an ETF should be, with many market participants settling on a value around $25–50 million. However, this should only be considered a starting value, and many issuers have successfully collaborated with large institutional investors to provide seed money for new ETF products.
The ability of seed capital from an investor, rather than the issuer themselves, to attract other investors who may have previously been wary of the ETF sector should not be underestimated, as it denotes a client-driven product strategy focused on fulfilling immediate demand. Client confidentiality must be maintained, but commitments to the new product from third parties should be actively advertised to existing and potential clients.
With Scale in Mind—Asset Mix Matters
The industry has recently witnessed the launch of “alternative ETFs,” providing returns on niche investment sectors such as catastrophe bonds, green energy, and other high-yield instruments. It remains too early to judge whether these products can be deemed a success, though they do appear to indicate a view that ETFs remain outside of their issuers’ traditional product offering.
These instruments are also not known to have heavy, frequent trade volumes and require both a high appetite for risk on the part of the client and highly specialised internal knowledge on where and when to invest. They can sit uneasily within a product that requires liquidity and seeks to reflect the intraday dynamics of market and investor activity in real time. If an ETF is invested in asset types that many investors—especially retail investors—don’t have the risk appetite for, it can be difficult to reach the size and mass-market scale that a cost-effective ETF requires. Alternative assets can be lucrative, but ETFs have yet to be proven as an essential vehicle for access by the broader market.
Follow the (Demand) Leader
European investment managers stand at an inflection point. Investor interest in ETFs has given way to action, with impressive inflows making demand clear. Despite the opportunity seen with leading firms, entry into the space does not guarantee success. Alignment with client needs is paramount, but consideration of existing capabilities and a plan for scale are also valuable to set you down the right path.
With the right product, investor support, and a launch plan that capitalises on the highly developed services already existing in the market, investment managers may find their entry into the ETF market to be foundational to one of the more dynamic and lucrative sectors of their business.
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