InvestmentsOct 24 2012

European market in the vanguard

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The wealth market is adjusting and re-positioning itself for this new investment landscape and there are real rewards for those who innovate effectively. Wealth advisers can benefit from the experience of large institutions by using products that have proven successful in the institutional space while enjoying the same low expense ratios. As a case in point, the European Exchange Traded Fund market is primarily driven by large institutional investors which have created significant refinement and increases in both efficiency and product quality, providing opportunities for wealth managers.

The ETF investor base has continued to grow, even while traditional managers have struggled to raise new assets. Over the last year, global ETF inflows have outpaced traditional fund asset accumulation (relative to the existing asset bases) resulting in an increasing percentage of assets being held in ETF structures. In the US, ETFs now represent around 9 per cent of fund assets. In Europe, existing penetration is closer to 4 per cent and rising. The European market for ETFs is much younger but there is every indication that it can follow the same path as the US. This will lead to further increases in product choice, continued development of trading activity and ongoing pressure on product providers to reduce costs and improve fund efficiency.

The European ETF market is driven by some of the world’s largest and most sophisticated investors. This benefits the market, spurring rapid development and innovation, and also creates a significant opportunity for smaller investors. Investing alongside some of the largest investors in the world (national pension funds, sovereign wealth funds, top tier asset managers and industry leading insurance companies) opens the door to some of the most compelling and efficient products in the market.

Recent regulatory developments have been very positive for ETFs in that they have helped to codify best practices in the industry. European ETFs benefit by being part of Ucits, a well-developed and respected regulatory regime which harmonises fund regulation across national boundaries. Ucits has been developed to embrace and refine innovation. Changes and improvement occur on a continuous basis in the European ETF market and Ucits regulation creates a robust framework for investor protection.

ETFs are well recognised for delivering highly efficient and tradable exposure to well-known benchmarks. But the investment opportunities offered by ETFs are not limited to FTSE100 and S&P 500 trackers - there is an array of value added products available. These may offer a sector exposure or strategy that investors do not typically have access to, or products incorporating some element of “smart beta” or even active management.