European investors plan to increase or maintain their allocation to exchange-traded funds in the next 12 months as ETFs in the region gathered a record level of assets in the first nine months of this year.
A survey by Brown Brothers Harriman, which provides asset servicing for the ETF market, found that 98% of respondents plan to increase or maintain their portfolio allocation to ETFs in the next year. The report said: “This is a reflection of the hard work carried out by ETF issuers and the industry to promote the benefits of ETFs to all investor types.”
BBH surveyed more than 120 investors in the European ETF market in partnership with ETF.com and Deutsche Asset & Wealth Management. BBH has launched ETFs with over 25 ETF sponsors totaling more than €275bn of assets under custody.
In the first three quarters of this year ETFs/ETPs listed in Europe gathered a record level of $61.6bn of net new assets, virtually the same as the net new assets raised in the whole of 2014, according to consultancy ETFGI. As a result the European ETF/ETP industry had assets of $480bn at the end of September.`
Equities had the largest net inflows of $36.1bn, followed by fixed income with $20.2bn. Commodities and the smallest net inflows of$811m in the first nine months of this year according to ETFGI.
The BBH survey found that equity ETFs are currently the most popular asset class among investors. The report said: “However, fixed-income ETFs have started to gain traction and have enjoyed strong flows in 2015. Currency and active ETFs are evolving in Europe. Therefore, it is not surprising that they have relatively low levels of adoption.”
In Europe, ETFs are between zero and 10% of assets under management for 60% of respondents in the BBH survey. In comparison BBH’s US Advisor Survey last year found that 70% of respondents have more than 10% of their assets under management invested in ETFs. “This reflects the maturity of the US ETF market and the difference in ETF holdings could indicate the potential growth for ETFs in Europe,” added the report.
One area of potential growth is smart beta ETFs, which are designed not to track the benchmark market-cap weighted indexes, but instead track bespoke indexes that can be lower in volatility or more geared towards income. In Europe smart beta ETFs are less than 5% of total assets under management for 85% of respondents in the BBH survey.
“We have seen that investors want to see an established performance track record, generally of three years, before they are willing to invest,” added BBH. “As smart beta is relatively new to the European market, smart beta strategies will need to establish a track record and then they will be well positioned for growth.”
In the next 12 months, 66% of respondents plan to increase or maintain their allocation to smart beta and as advisers become more comfortable with these products, adoption is likely to increase.
Respondents also want more multi-asset and alternative-asset class ETFs.
“We have started to see multi-asset indexes come to the European market,” continued BBH. “Alternative asset classes are becoming more popular with investors as they seek diversification and non-correlated returns. However, product development may prove challenging to implement in an ETF wrapper.”
Featured image by Sergey_p/Dollar Photo Club
