ETF market plagued by Brexit worry

ETF market plagued by Brexit worry

The vast majority of providers, promoters and investors of exchange-traded funds are wary about the threat posed by the UK leaving Europe, as a fresh report suggests passive investments are not immune from the Brexit turmoil.

A survey compiled by accountancy giant Ernst & Young found that 80 per cent of the interviewees saw Brexit as a threat to both the UK and European ETF markets.

Around 80 per cent of the 70 ETF promoters, investors, and providers who were interviewed have set up groups to consider the impact Brexit could have on their business.

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The report pointed to the questions about market access, labour movement and Ucits - mutual fund based in the European Union - which are still unanswered, adding: “Promoters worry that the UK’s status as Europe’s largest and most promising market will be undermined.”

Brexit also threatens the proposed merger between the London Stock Exchange and Deutsche Börse, as well as the LSE’s “importance” as a trading venue, the E&Y report stated. 

“For example, many promoters currently list their exchange-traded funds on the Irish Stock Exchange, allowing it to be traded on the London Stock Exchange – a connection that is now called into question. 

“In the event of a ‘hard Brexit’ ETF firms in Ireland and Luxembourg expect to enjoy an influx of investment.”

E&Y also raised concerns that European regulation, which is “already complex and costly”, has the potential to become more onerous. 

“The European Securities and Markets Authority’s consultation on index regulation is creating uncertainty, and there is a sense that scrutiny of ETFs is increasing.”

But the report painted a positive picture in terms of the assets in the ETF market, and said the European funds have grown rapidly, boosted by take-up from institutional investors.

E&Y expect the sector to see assets under management almost double to $1.1trn (£0.9trn) by the end of 2020, with an average annual growth rate of about 16 per cent.

Nic Round, chartered financial planner at Trēowe Wealth Advisers, said he was not worried about the impact of Brexit on the ETF industry.

"The goal posts might change, but it's a fund management issue, and I think fund managers have more to worry about with pressure on charges and transparency, rather than the Brexit logistics."