ETFs (exchange-traded funds) will celebrate 32 years of existence in 2022. It is an anniversary that is hardly noticed by the markets. Yet ETF trading flows are accelerating and have never been so high. “Last year in Europe, the ETF market attracted a net of over $200bn,” observed Olivier Paquier, head of EMEA distribution of ETFs at J.P. Morgan AM.
Historically, ETFs emerged as trading tools to access index management, i.e. a form of management that aims to replicate the performance of a basket of stocks or bonds. Since the early 2000s, however, ETF investors have shown a curiosity about other types of management.
“In recent years, many investors have turned to fundamental active management, for example, which aims to outperform indices with a different risk/return profile and time horizon,” Paquier noted in an interview. This type of management has the advantage of favouring a human approach, often excluding the use of machines and artificial intelligence.
The interest of individual clients
Like active fundamental management, thematic and ESG management have also entered the ETF market. “With so many ETF offerings, we are seeing more and more clients participating in this market,” Paquier stated.
The characteristics of ETFs mean that they meet the needs of a large proportion of retail investors. In the form of traditional Ucits, regulated and registered for marketing, this type of financial instrument must comply with both asset diversification and transparency requirements. Unlike traditional investment funds, ETFs provide daily transparency on the status of their portfolios. That is information that investors can find on any financial intermediary website. Paquier specified: “An ETF is quoted on the stock exchange, i.e. evaluated in terms of price almost in real time, refreshed every 15 seconds”.
In addition, Paquier pointed to another benefit for the retail client in the settlement-delivery phase, i.e. the final phase of the securities purchase-sale process, which takes place via a clearing house in the case of ETFs. “The order is guaranteed by an exchange. Then a clearing house ensures that the settlement is carried out so that, in the event of a counter-party default in the market, the clearing house compensates the client. It’s the same way it works as with any type of stock or bond traded on the markets.”
European market
The European ETF market encompasses nearly $1.4trn under management, with growth rates of more than 20% each year, according to figures from J.P. Morgan AM. This makes Europe the second largest ETF market after the US, which has more than $6.8trn under management.
Even if the difference remains significant from one side of the Atlantic to the other, “Europe is by far the most advantageous and competitive market in the world from an investor’s point of view,” said Paquier. This is “because it is four times smaller than the US market in terms of size, but has an equivalent product offering.”
Noting the dynamism as well as the competitiveness and constant innovation of the European market, Paquier said that the evolution of the ETF industry continues its original philosophy of democratising investments. “Thirty-two years ago, it was revolutionary to be able to invest in more than 500 stocks via a single transaction, a single product and a single occurrence of stock market execution fees.” Since then, ETFs have democratised the financial markets for many investors, both individuals and professionals who need simplified access to the markets.
Originally published in French by and translated for Delano. This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. .