After 28 years in existence, the Exchange Traded Fund (ETF) market is still relatively young; yet it has revolutionised the asset management industry. As a disruptive investment vehicle, it has given retail investors access to asset classes that were previously beyond their reach. There is a clear trend to the exodus from active funds across the globe1, which presents a prime opportunity for ETF providers to grow significantly.

Nowhere is this potential more evident than in the European ETF market. At present, the ETF market in Europe is considerably smaller than the market in the US despite the first ETF listing in Europe taking place eighteen years ago, in April 20002. In fact, at the end of last year, European turnover was equivalent to just 5.5 per cent of US market turnover3.

HSBC Securities Services recently hosted a roundtable event in NYC with several large asset management firms who were looking to learn more about the European ETF market and the opportunities and challenges it presents.

Discussing the topic, there was a consensus that there are a large number of divergences between the US and European ETF markets and any US firms thinking of moving into the European market needed to be aware of the key differences between the two markets.

US firms should keep in mind the diverse nature of the European Union nations. Despite ETFs being unified under the UCITS umbrella, a common set of rules for the cross-border distribution of collective investment schemes via the European Passport, there are country specific marketing and trading nuances which need to be catered for. Unlike the US, which has 2,085 ETFs on just three exchanges4, ETF trading has spread to 25 exchanges across Europe5, with an all-time high of 6,607 ETF listings6. Furthermore, in the US all trades are settled in the Depository Trust and Clearing Corporation, by contrast the European Central Securities represents 38 members, which can make redeeming ETFs more time-consuming and costly7.

There may be some eagerness amongst providers to jump into the European ETF market given these recent changes. However, one key takeaway from the roundtable discussion was a warning to firms to stay focused and exercise patience when entering a new market. Careful planning is necessary and should include stakeholder engagement and sensible growth aspirations.

Evolving regulatory change is offering much promise to the European market, however. MiFID II, which came into effect on 3 January 2018, requires every ETF transaction to be reported, which is leading to increased transparency on trade volumes8. This should help integrate the European market and ensure that accurate data is made available to investors to allow them fully appreciate the trading volumes of a listed product9. All in all, Europe’s scope for further growth looks very strong, particularly when taking into account the considerable distance it remains behind the US and Asia Pacific in terms of marketshare10.

There may be some eagerness amongst providers to jump into the European ETF market given these recent changes. However, one key takeaway from the roundtable discussion was a warning to firms to stay focused and exercise patience when entering a new market. Careful planning is necessary and should include stakeholder engagement and sensible growth aspirations.

Likewise, firms should consider creating a dedicated capital markets team and ETF sales force. While ETFs are comparatively simple to understand, they are different to other fund wrappers. Without catering for the specific ETF distribution features, market entry could be unsuccessful.

HSBC ETFs servicing capabilities

For those firms wishing to break into the European market, HSBC offers rich knowledge of the intricacies and requirements of this diverse marketplace. Since 2009, HSBC has offered a wide range of ETF capabilities across Europe and as asset management companies look to internationalise their business, HSBC has the experience and global network to make market entry and success more achievable.

HSBC Securities Services was recently appointed by Tabula, a passive fixed income asset manager, to provide a bundled service solution to its new ETF platform in Europe. Tabula offers Irish domiciled UCITS funds, mainly in the form of ETFs and plans to launch a range of fixed income ETFs targeted at pan-European investors. This is just one example of how the European ETF market is developing and how HSBC is playing a key role in this growth.

1HSBC; Asian ETFs – a market driven by innovation; https://bit.ly/2KQIEFf

2ETF.com; The Fragmentation Of The European ETF Market; https://bit.ly/2vYF2HQ

3Centre for European Policy Studies; The European ETF Market: What can be done better?; https://bit.ly/2HSdsRo

4Ibid.

5Financial Times; ETF providers hope Mifid II will spur European growth; https://on.ft.com/2NyVzdE

6Centre for European Policy Studies; The European ETF Market: What can be done better?; https://bit.ly/2HSdsRo

7Financial Times; The differences between US and European ETF markets; https://on.ft.com/2gEt2S8

8Euromoney Seminars; MiFID II bodes well for ETF; https://bit.ly/2u75nm8

9Centre for European Policy Studies; The European ETF Market: What can be done better?; https://bit.ly/2HSdsRo

10HSBC; Passive Investing Solutions For Your Clients; https://bit.ly/2Ns3KIu

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