According to ETFGI data from the end of June, total assets in the European ETF market are now worth around £300bn.
While ETFs were once used primarily by large institutional investors, such as pension funds, but are now being used by a much wider range of investors, according to Christopher Mellor, head of equity product management at Source.
He says this includes financial advisers and wealth managers who are responsible for advising on and constructing portfolios for their clients.
“ETFs can fill a wide range of roles in investors’ portfolios, from providing core benchmark equity or fixed income exposure to allowing targeted exposure to key investment themes or factors.
“There are more than 1,500 ETF products, according to ETFGI, listed on European exchanges, giving investors a wide range of options and exposures.”
Townsend Lansing, head of short/leveraged and FX platforms at ETF Securities, says ETFs are increasingly being viewed as a vehicle for long-term holdings, as they can be used both strategically in their allocation as well as on a tactical basis.
One of the biggest adopters of ETFs in the UK has been the discretionary management community, Mr Lansing notes.
“There has been an evident shift away from a bottom up approach to portfolio construction to a top down asset allocation-driven process and we are seeing ETFs being used across model and bespoke portfolios, implementing both strategic and tactical investment strategies.
“Mutual funds still make up the majority of assets across the investment management industry, but as investment philosophies and processes continue to shift alongside continuing regulatory developments, ETFs will continue to eat into mutual fund market share.
Mr Lansing says that ETFs are being used as the building blocks in portfolio construction, but to fully understand their importance, one cannot ignore the investment access that they have provided.
“In many respects they are democratising the investment landscape – offering investors the opportunity to construct diversified portfolios, implementing strategic and tactical investment strategies across a number of different asset classes.”
Depending on the investment objective, ETFs may be a powerful tool in an investor’s portfolio, says Vivian Tung, vice president for product strategy and Global ETF product at Brown Brothers Harriman.
“ETFs offer investors a way to diversify by owning one security,” she says. “Since there are no minimum requirements, investors may purchase as little or as many ETFs as needed to achieve the desired investment objective.”
As ETFs continue to evolve, Ms Tung says there are some additional active type products which are intended to provide additional returns in the form of Smart Beta and Active ETFs. They can also be used to equitize cash as well as a hedging instrument.