The European ETP (Exchange traded product) industry remains concentrated, despite the entry of new players in recent years. According to a recent Morningstar study entitled A Guided Tour of the European ETF Marketplace, iShares (BlackRock group) holds 46,4% of the market with €253 billion in assets under management. They are followed by db x-trackers (Deutsche Bank group) and Lyxor (Société Générale) with respectively 9,8 and 9,3% of the total.
Overall, the European market for listed indexed products is worth around €550 billion, one-fifth the size of the US market, but with a higher number of products. The main reason is fragmentation which has led issuers to launch full product ranges on multiple exchanges to be competitive, resulting in duplication. For example, there are twelve providers offering replicators of the Euro Stoxx 50 index, placed on one or more different listings.
Few marriages between broadcasters
Against this backdrop, consolidation has been very limited in recent years. iShares bought the ETF arm of Credit Suisse, WisdomTree acquired BoostEtp and most recently China Post acquired Market Access ETF, which belonged to the Royal Bank of Scotland. According to Morningstar analysts, there may be a few more deals and at the top of the list would be ComStage (Commerzbank) and Source.
If marriages are rare, new entries, on the other hand, are not lacking and often the active managers are the protagonists. For example, one of the methods followed by Pimco and Goldman Sachs is to ally with existing operators, such as Source and ETF Securities. But there are also those who want to go it alone, such as the Canadian BMO, and those who are preparing to cross the threshold of the European passive management market (in particular, the names of JP Morgan, Fidelity and Franklin Templeton are mentioned).
More and more physical replication
In recent years, changes have also affected products. In particular, the transformation of many synthetic replication (swap-based) instruments into physical instruments continued (through the same securities of the reference basket). According to Morningstar statistics, the latter represent 77% of the total assets of European ETPs (66% at the beginning of 2014).
Players who were formerly major proponents of the swap-based approach, such as Lyxor and db x-tracker, have been working on transforming existing products or launching new physicists. Furthermore, Amundi recently said it would open almost all of its synthetic range to stock replication.
The risk is to go from one extreme to the other. There are cases where the direct approach is not suitable for the characteristics of the target market. However, the heated debate and strong criticism leveled by various parties to swap-based means that issuers leave this option as marginal compared to physical replication.
More transparency with Mifid 2?
Again at the product level, news will come from Mifid 2, the European directive on financial instruments, which should come into force on 1 January 2018 and will lead to greater transparency of financial instruments, especially as regards costs. This factor should favor low-cost solutions, such as index funds and ETFs, over more expensive ones. Furthermore, the legislation requires higher disclosure on transactions, while today it is estimated that 50-80% of traded-fund negotiations take place outside the official circuits, without any reporting. Greater transparency would mean having a clearer representation of the liquidity of each instrument.
Source: morningstar.it
