Exchange-traded funds (ETFs) in Europe became even more popular during 2014. That was shown by the assets under management, which were set to hit all-time highs toward the end of the year. The net flows into ETFs were also at record levels.
This raises the question of whether ETFs can continue their success in 2015 and the years beyond. To find out more about the future growth strategies of ETF promoters, Detlef Glow—Lipper's Head of EMEA Research—spoke with Simon Klein, Manging Director, Head of ETPs & Mandates – EMEA & Asia at Deutsche Asset and Wealth Management, during the Lipper Expert Forum in London on November 11, 2014.
What are the major challenges that ETFs face with regards to the growth of the overall ETF segment right now?
All the pieces are in place for more growth of the ETF segment: the products, the liquidity, the experience of serving clients demanding top quality index tracking products. The biggest challenge is to educate the financial industry – investors, advisors, consultants and many more – about the rich possibilities that ETFs offer. We now have the experience to implement complex ETF strategies, such as creating low-volatility portfolios, sector-momentum or factor-based portfolios. Another challenge will be to react to the ongoing structural changes in the IFA market in the UK, Germany and other countries, following regulatory reforms. There is a big opportunity for ETFs to approach investors directly and win new clients. I believe ETF providers that have a strong brand and stable infrastructure will have the advantage.
There is a lot of noise around so-called smart beta or factor investing ETFs at the moment. Are these products the next big thing in the ETF industry?
I wouldn't say these products are the next big thing, but their development is a logical step for the market. Everybody expected that there would be more choice in terms of index construction. Factor investing is a proven and well established concept that takes a fundamentally different approach to market capitalization indices. It brings another dimension of risk diversification, and that is exactly what investors are looking for right now. So strategic beta or factor investing is an established concept. The only thing that has changed is that we are now seeing investor demand growing for these types of alternative index investments. That's why we launched our four equity factor ETFs.
From your point of view, what will be the growth drivers (markets/client segments/products/etc.) for the ETF/ETP segment in the next few years and how do you ensure that db x-trackers will participate from these trends?
One big growth driver will be the demand for fixed income ETFs. Investors are looking for cost efficient alternatives in the current ultra-low yield environment. Innovation will also be key to future growth. Deutsche Asset & Wealth Management was one of the first to offer access to the Chinese A-Share-market and to a truly global investment-grade fixed income index. Both were very successful in terms of net new assets.
When you look at client groups we see that institutional clients are starting to use ETFs for strategic purposes, and not only for tactical asset allocation. Similarly, independent asset managers are using ETFs instead of stock picking in core markets. Both trends have just started and will fuel market growth in the market. We offer a model portfolio platform for institutional investors and sophisticated research to help our clients to utilize ETFs.
How will the ETF/ETP landscape (products, promoter, trading, availability of products, etc.) change over the next five to ten years?
We expect there may be more consolidation within the ETF industry. There are only half a dozen market players with substantial inflows and a broad product offering at the moment. We do not think there will be new competitors coming into the market (at least offering mainstream benchmarks) because the market entry barriers are substantial. On the product side we expect more launches in the strategic beta and in the fixed income space – although the established equity ETFs will get a big share of the inflows.
We could also see a concentration of ETF flows on a few exchanges. The liquidity of the European ETF market is split across many exchanges, which is a big disadvantage in relation to the US market. Last but not least I expect ETFs to be a more integrated part of the financial industry, as I mentioned above. From transition management to asset allocation to retirement savings, ETFs can be used for a variety of purposes and also will not be seen as a standalone investment. This will be a big change in the ETP landscape.