ETFs on the rise

There is no doubt that ETFs have opened up a new era of investment opportunities and are enjoying a spectacular growth. In Europe, listed ETF asset under management (AUM) increased by 43 per cent to $128bn (e87bn) in 2007, according to Morgan Stanley’s recent global industry review. But what is the proportion of these that are invested by clients of wealth managers? And what percentage of the worldwide $2,000bn AUM in ETFs forecast by the bank in 2011 will be attributable to the uptake of index investing in the retail and wealth management sector? Eleanor Hope-Bell, head of wealth management sales at iShares, the ETF brand spun out of Barclays Global Investors, estimates that the migration in the use of ETFs from the institutional world to the wealth management and retail space that occurred in the US over the past 15 years, will take place in the European market too. In the US today, 55 per cent of ETFs’ total assets are deployed in the wealth management and retail space, explained Ms Hope-Bell, while around 45 per cent is attributable to institutions. “Today, in Europe, we would estimate that institutions account for 70 per cent of all assets under management in ETFs, while the wealth retail space accounts for 30 per cent,” she said. “But we think it is going to shift, and the majority is going to be wealth retail.” As it took the US more than ten years - from 1995 to 2008 - to implement this migration, the timescale will be similar in the old continent, estimated Ms Hope-Bell. She says there are two major drivers which will contribute to this shift. The first is the growing awareness of alpha-beta separation, which is much discussed in the institutional world, and a concept gaining growing popularity and driving demand in the wealth management arena. “As the underlying retail clients become more educated and aware of the concept of alpha-beta separation and the cost involved in actively managed funds, which are actually returning beta or market return, they will start demanding that the alpha-beta separation becomes real,” explained Ms Hope-Bell. Secondly, regulatory changes in Europe, such as MiFID, requiring fee transparency, should also drive a growing use of ETFs. “With the new regulation comes the fiduciary responsibility of the wealth managers as well,” said Ms Hope-Bell. “For a very long time, even at the global private banks, the feedback was ‘come back to us when you pay rebates’, as at a senior level they have to show that they are making money. But now things have changed,” says Ms Hope-Bell.