The European ETF industry has written a true success story since its inception in the year 2000. Nevertheless, I expect that the European ETF industry will continue to grow on an above average rate compared to the overall fund industry in Europe. The future growth will be driven by numerous factors from a wider adoption of ETFs by all kinds of investors to product innovations and everything in between. Even after the strong growth of the European ETF industry over the course of 2023, I won’t change my prediction the assets in the European ETF industry will increase to more than €2.5 tr before the end of 2030. This estimated applies an annual growth rate of 8.00%, which may sound a bit conservative, but since the growth of the assets under management is also depending on the conditions in the securities markets, this might be a fair assumption since a bear market can offset the growth in assets under management of several years in a quite short time period.
Despite the fact that I stick to my earlier assumptions, I needed to adjust some of the growth drivers, since the adoption of artificial intelligence (AI) has the potential to change the way how ETFs will be developed in the future.
Graph 1 Assets Under Management in the European ETF Industry (in bn EUR)
Source: LSEG Lipper/private calculation
First of all, I expect a wider adoption of ETFs by retail investors from all over Europe, as retail wealth management platforms such as Nutmeg and the so-called neo-brokers such as Scalable Capital or Trade Republic witness a steady growth of customers. The growth of ETF saving plans from retail investors in Germany via these and other kinds of platforms might be seen as a blueprint for growth for the rest of Europe. In addition to this, some ETF promoters such as Vanguard started direct-to-consumer platforms which enables retail investors to buy their ETFs directly from the respective promoter, which may become another source of growth.
While I expect that retail investors will mainly invest in equity ETFs, I assume that the growth in the bond segment will mainly be fueled by institutional/professional investors. The return of interest rates brought bonds in general and bond ETFs in particular back on the agenda of professional investors.
Considering this, I expect that the promoters of ETFs in Europe want to take profit from the trend toward bond products and will start to launch products which fill the current gaps in the overall bond ETF offering. Additionally, I expect that the majority of the newly launched bond ETFs will cover specific segments of the bond markets such as single rating segments, convertibles, or green bonds, etc., in various base currencies. Since some of the trends in capital markets start without a large investor audience, the promoters of ETFs may use AI to identify market trends and launch respective products. I am also expecting that that the European ETF industry will launch a high number of active bond ETFs in the not so distance future, since such products might be in high demand from retail and professional investors and may therefore become one of the key growth drivers for the European ETF industry. In addition, I am sure that we will see more specialized ETF promoters such as Tabula launch highly sophisticated bond strategies to cater to professional or institutional investors who want to invest beyond plain vanilla bond strategies.
That said, I expect that the more specific bond ETFs covering single rating segments or maturity/duration bands will get a lot of attention from institutional and professional investors since these ETFs could be used as proxies for single bonds as they deliver a comparable risk-return profile, but without the issuer risk of a single bond.
The continuing trend toward sustainable investing will drive the growth of ESG-related ETFs. Following the wave of mutual fund and ETF reclassifications related to their respective sustainable finance disclosure regulation (SFDR) articles in 2022, caused by the publication of more stringent than expected regulatory technical standards (RTS), index providers, and ETF promoters now have clarity on how to structure indices and products to meet the regulatory requirements for article 8 and 9 products. This means the ETF promoters are now able to develop products which will meet the expectations of all kinds of investors. I am also pretty sure that the trend toward ESG-related investment products will stay in place even as the European Commission may change their approach after the outstanding SFDR review.
Talking about trends in ESG investing leads somewhat naturally to talking about thematic investing since a number of ESG-related themes such as the hydrogen economy, carbon efficient construction and buildings, electric vehicles (EV) and the respective charging infrastructure, smart grids, alternative energies, solar and/or wind power, or water to name just a few, are investable themes which can be accessed with an ETF.
That said, there are already ETFs available that cover some of these themes, but as we are in an early stage of the transformation to more sustainable economies, I assume that there will be much more of these ETFs available to European investors in the near future. It is already clear that not all of these themes will succeed and that some of them will become obsolete or will be replaced by more advanced technologies, while others will become successful and may, therefore, attract high inflows from institutional and retail investors. This means on the one hand, that there will be a lot of ETF launches based on sustainable investing themes, while on the other hand this means there will be a lot of ETF closures since ETFs which are not able to gather enough assets under management to be profitable will be liquidated or merged by the respective promoter.
From my point of view “themed ETFs” are another segment of the ETF industry where AI might be used to identify themes and the constituents of the respective indices before they become visible for a wider investor audience. Nevertheless, ETF promoters need to be careful with the usage of AI to identify new themes or trends, since not all themes which may look attractive for investors in theory will be realized on the securities markets. With regard to this, one needs to bear in mind that an unsuccessful ETF not only costs money for the promoter and the investors. Closing too many products because of the lack of assets under management also bears reputational risk for the ETF promoter.
Since all the above was about existing trends and products and how they may change the European ETF landscape or drive the growth of the European ETF industry, one may ask themselves whether there is nothing new in front of us.
From my point of view, the so-called non-transparent or active ETFs might become the main driver for the growth of the European ETF industry once the regulators in Europe approve the launch of such products. If the approval of non-transparent ETFs is accompanied by a Europe-wide ban of inducements for independent financial advisors (IFAs) and platforms, etc., these products will be a game changer for the fund distribution landscape in Europe. The approval of non-transparent ETFs will enable the promoters of mutual funds to distribute their products via a local exchange direct to investors without negotiating distribution agreements with banks, financial advisors, and distribution platforms.
Even as a general approval of non-transparent ETFs seem to be a few years away, we already see that some local regulators in Europe are preparing their markets for ETFs which are not based on an index, while some promoters of actively managed mutual funds have started to build a footprint in the European ETF industry by offering ETFs which do not replicate a plain-vanilla index. Instead, those ETFs are based on indices which are somewhat active. While some of those managers have chosen to build their own ETF platforms, others may use so-called white label platforms because it can be very expensive for an asset manager to set up a fully fledged ETF infrastructure. These white label offerings make it (especially for smaller asset managers) affordable to launch and maintain an ETF product range since they can use the existing infrastructure and service range of the white label ETF platform on demand.
In other words, white label ETF platforms can foster the future growth of the overall ETF industry by enabling smaller or boutique asset managers to use the ETF structure as distribution wrapper for their portfolios. That said, white label platforms can become a growth area for themselves. While this space was owned by hanETF since the launch of the company in 2017, we witnessed the launch of respective offerings by Goldman Sachs and Waystone in 2022. The launch of new ETF white label platforms may also indicate that there is a high demand from asset managers, which may materialize in an increasing number of asset managers and products available to investors in Europe. That said, the end of the Vanguard patent on ETF share classes of mutual funds may lead to a high number of new ETFs as share classes of existing active managed mutual funds. HSBC was the first fund promoter in Europe who announced that it will launch respective ETF share classes. Nevertheless, there are still some barriers, especially with regard to the transparency of the underlying portfolio, for active managers to enter this market segment. That said, we witnessed that the two leading fund domiciles in Europe—Ireland and Luxembourg—have already published guidelines on how to fulfil the naming requirements (UCITS ETF) for actively managed funds which want to launch a ETF share class.
To sum up my thesis, a Europe-wide adoption of ETFs by retail investors will, in combination with new fit-for-purpose conventional as well as ESG-related bond and equity products, be the core drivers for the future growth of the European ETF industry. Nevertheless, an industry wide usage of ETF share classes of actively managed mutual funds would be a game changer for the whole fund industry ecosystem in Europe and may make the forecast of a doubling in AUM obsolete, as such a move will drive the growth rate of the AUM much higher.
The views expressed are the views of the author, not necessarily those of LSEG.
