European exchange-traded funds (ETFs) have been on the rise during the past decade. MorningStar reports that the adoption rate of passive products grows every year, but hasn’t yet reached the heights of the US market. Approximate numbers that quantify ETF assets under management in Europe reached €1.8 trillion (data according to Q1 2024) as MorningStar reports. That is 10% higher than in the previous quarter. While the numbers are certainly growing, it’s time to take a closer look at the asset management industry, the role ETF plays in it, the trends to watch, and the challenges to overcome.
The State of ETFs in Europe
The asset management industry isn’t run by exchange-traded funds just yet. By the end of last year, 26.7% of total assets under management in Europe were assigned to passive strategies assumed to replicate a benchmark.
Europe-Domiciled OE Funds & ETFs
Source: morningstar.com
That means, just over a quarter of all managed assets are open-ended funds and ETFs, while the rest of it are market funds and funds of funds. Still, the numbers are impressive if we compare them with those a decade old. Ten years ago, 12.3% was the total passive market share. At the same time, US passive fund assets have surpassed the 50% mark for the first time in history. Active management has faced significant challenges over the past two years, experiencing notable net outflows.
More Markets Getting for the EFTs
The surge of exchange-traded funds (ETFs) in Europe took off around the 2008 financial crisis, MorningStar sources claim. Their popularity among institutional and retail investors was growing rapidly due to their transparency, simplicity, and, most notably, their low costs.
Since then, ETF fees have steadily declined, culminating in the fierce price competition of 2018-2019, with some funds now offering fees as low as a handful of basis points. Lately, AI has entered the game, and most of the deals nowadays are concluded in the AI-run software. AI is transforming the asset management landscape, with increasing investments in new technologies aimed at enhancing investment strategies.
If you’re looking to hire professionals to help you with AI-run fintech software building (or any other tasks of that kind), Elinext got you covered. Contact us to discuss your future project.
In 2023, global inflows into environmental, social, and governance (ESG) ETFs declined as investors sought safer assets like large-cap equities, government bonds, and short-term debt amidst economic uncertainty. Despite this cautious approach, ESG-focused ETFs are expected to remain a key long-term investment trend, particularly in Europe.
ETF savings plans have surged in popularity, particularly in Germany (two-thirds of the European investments come from Germany). Approximately €200 billion had been invested in European ETFs through such plans. This figure is projected to climb to €650 billion by 2028.
The growth has been driven by a significant rise in private investors and the increasing appeal of ETF savings plans offered by online neo-brokers.
These platforms provide commission-free trading through apps, making it easy for individuals to set up regular monthly investments. Currently, annual contributions to these savings plans across Europe are estimated to reach around €15 billion.
Why ETFs Are Growing? Main Factors
ETFs usually follow an index and have lower fees than funds. With one trade, you can get a mix of investments at a low cost. They’re clear, efficient, and can help you save on taxes. In the US more than in Europe though
Everyone’s Investment Opportunity
ETFs are like a level playing field in the financial world. They make investing easier for everyone, from small investors to big companies. ETFs let one invest in many different ways, including active management, factor-based strategies, and thematic strategies. One can invest in traditional things or more specialized markets, like technology and sustainability.
ETFs have grown a lot in different asset classes. New types of ETFs have also come out, like those that use derivatives or focus on commodities and currencies. This shows how the industry is flexible and wants to meet everyone’s needs.
Meeting Investors’ Diversified Needs
Today, ETFs are important when making investment decisions. They help investors focus on different portfolio goals more efficiently. ETFs are very popular, so they’re easy to buy and sell, especially when the market is unstable.
Transparency is the Key
As ETFstream reports, quite several European jurisdictions take a thorough approach to avoid regulatory divergence. Regulators from the Central Bank of Ireland (CBI) are promising to have a closer look into ETF portfolio transparency rules this year, and so is the French regulating organ Autorité des Marchés Financiers (AMF).
Luxembourg announced an actively managed ETF exemption subscription tax after 2025, which makes the investment option even more attractive in this country.
The regulatory adjustments are well timed, according to the experts, so active ETFs have gained in inflows of $6.8bn in the first half of 2024 ($4.5bn – in Q2).
Room for Growth
We can see the uprising in the trends, and there is plenty of room to grow in Europe (looking at the current ETFs US state). As factors contributing to the ETFs’ growth are piling up and likely won’t go away.
Challenges for The Growth
It would be tempting to draw a line through current growth rates and assume a constant
trajectory in retail adoption of ETFs.
However, there are certain challenges out there. Unlike open-ended funds, ETFs cannot call for new investors, making them unsuitable for strategies with limited capacity. This is one reason why ETFs often focus on large-cap assets.
Another notable feature of ETFs is their mandatory transparency in holdings. While many view this as a positive, it can pose challenges for asset managers who are building positions over several days or weeks, as other investors may try to front-run these moves.
Active ETFs remain relatively under the radar, partly due to limited media coverage, especially in Europe, where there are no tax advantages as big as in the US.
People in Europe seem to prefer sustainable options more than the US.
One local challenge is that platforms have trouble handling ETFs, but many market players can still benefit. Over the past year, there’s been more buzz about active ETFs in Europe, with companies like JP Morgan Asset Management expanding their offerings.
Software Development for ETF Trading
Among the leading brokers for ETF tradings are Degiro, Saxo, and XTB. Most commonly, people use the broker based on how much they have to pay for an EFT trade. However, the availability and user-friendliness of the software used in action have a great impact as well.
Entering the growing market of brokerage of ETF trading, one has to partner with a company that has experience in specialized software to support ETF trading. A little hint: you’re reading this in the blog of the company that specializes in it. Contact us to discuss cooperation opportunities.
As for the functionality such software should include, seamless access to various exchanges, execution of orders, and real-time data processing. Naturally, software must support the creation of customized trading algorithms.
Here is the basic set of functions ETF trading software should possess:
- Trading algorithms and automation
- Real-time data integration
- Risk management tools
- API Integration
- Friendly UI/UX
If you’re looking to enter the game, make sure that all these features are included in your future custom solution you may later offer to the market.
Summary
The European ETF market is experiencing a surge, with passive strategies gaining traction and investor interest growing rapidly. While Europe lags behind the US in terms of overall adoption, the trend is undeniable.
Despite having some of the limiting factors, the European market players are actively addressing the existing challenges. The increasing buzz surrounding active ETFs and the growing popularity of sustainable options highlight a dynamic and evolving market.
With continued innovation, education, and platform development, ETFs are poised to become a dominant force in European asset management, offering investors a powerful and accessible tool for achieving their financial goals.
