Exchange-traded funds (ETFs) have been a hot topic in the fund industry and media for a few years now. In some cases one gets the impression that these "new" products are everywhere, and in other cases it sounds like they are taking over the fund industry. Even some fund professionals project that ETFs will have the favour of all kinds of investors in the near future, since ETFs as a whole have shown very high growth rates since their introduction to the European market in 2001 and accounted for 339.5 billion euros in assets under management on June 30, 2014. ETFs have become a serious part of the European fund industry.
Figure 1 Development of Assets Under Management of the European ETF Segment (in billion euros), December 2005 - June 2014
Source: Lipper, a Thomson Reuters company
Even though Figure 1 shows impressive development of the assets under management in ETFs, to become a real threat to the active fund management industry, ETFs would not only need to increase their market share in terms of assets under management but also increase their market share from the overall net new sales of the fund industry. Since this likelihood can only be answered by an analysis of the flows into mutual funds in Europe, Figure 2 analyzes the market share of ETFs (in percentages) from the estimated net flows for European mutual funds from all asset classes (including money market funds).
Figure 2 Market Share of ETFs (%) of the Estimated Net Sales of Mutual Funds in Europe, 2002-August 2014 (all asset classes)
*The year 2008 shows no bar, since mutual funds overall posted net outflows, while ETFs enjoyed net inflows.
Source: Lipper FundFile
With regard to Figure 2, it seems the market share of ETFs from net new sales is fluctuating in a range between 5% and 15% and peaked between the financial crisis (2008) and the Eurozone government debt crisis (2011)—a period when investors demanded liquidity, transparency, and clear investment objectives from their investment vehicles. Since these are key features of ETFs, it is not surprising that European institutional investors especially have shifted their assets from actively managed funds in the direction of their passive counterparts. This means that the overall growth of the ETF industry has been driven mainly by the general inflows into mutual funds, of which ETFs are obviously a part.
From my point of view, the development of the ETF segment was a real success story in the past. But to maintain success as a growth segment in the future, ETF promoters will need to unlock the potential of all kinds of investors and sales channels to ensure the market share of the overall net new sales increases. Otherwise, ETFs will show signs of saturation—fairly normal when a product matures—which might lead to lower overall growth rates for the ETF segment. ETF promoters must adjust and adapt their communication, product, and sales strategies to the demand and needs of different groups of investors to overcome this challenge.
I think there was and still is a lot of noise around the growth of the ETF industry as a threat to active fund managers. But looking at the numbers, I don't see that the ETF industry has become a real threat so far. Despite the clash of cultures between active and passive management, I see both management approaches as two sides of the same coin. Since the markets and therefore passive approaches would not work if nobody bought and sold securities based on individual views, either they are both right or both wrong.
I see a bright future for the overall fund management industry and strongly believe that ETF promoters in Europe will do their homework. Therefore, I see an even brighter future for the ETF industry; ETFs should be able to increase their market share from net new sales and enter a new growth path.
The views expressed are the views of the author, not necessarily those of Thomson Reuters.