Investors in the UK have been piling into passive products, but exchange-traded funds (ETFs) still lag behind tracker funds when it comes to interest from advisers.
Research and consultancy firm ETFGI reports that assets invested in ETFs and exchange-traded products (ETPs) listed in Europe amounted to $556bn (£452bn) at the end of November 2016, which was also the 27th consecutive month of net inflows into the offerings in the region.
UK intermediaries, however, are still hampered by the lack of ETF availability on many platforms. So while Dave Abner’s job as head of Europe for ETF provider WisdomTree may look easy, there are challenges in the continent’s largest market.
He took on the role when Hector McNeil, the former co-chief executive of WisdomTree Europe, departed last year. Mr Abner says his goals are much the same as when Mr McNeil was running the business, in that he is “helping to inject some more ‘WisdomTree DNA’ into the business” in the region.
He explains: “WisdomTree has always been known as being innovative and developing investment products for investors, with sophisticated intellectual property behind our products. Many of these are weighted by dividends and we were one of the first providers to bring currency hedging to equity baskets in ETF form.
“In the US, we have brought the first suite of fundamentally weighted fixed income products to the market. In Europe, and in the UK in particular, we have two main focuses in our Ucits range: we want to bring some of the innovative and best products WisdomTree has created from an intellectual property standpoint in the US to European investors. They typically like a Ucits wrapper, so we are going to bring funds in that wrapper.
“At the same time, we are going to continue the WisdomTree legacy of being innovative and finding places where investors have problems, but which we can bring solutions to the market that just haven’t been brought yet here in Europe.”
Mr Abner relocated his family from the US – where the ETF industry is much more developed and familiar to investors – to London for the role.
“One of the features of the market [in the UK], which is very different than in the US, is that there’s no centralised order book, so not all trading takes place on the exchange,” he observes.
“[In the UK] a lot of ETF trading takes place in what we call the ‘over-the-counter market’, and trades that happen without the ability for ETF liquidity providers to compete is a disadvantage for investors, because competition drives spreads tighter and that is good for investors.
“Having a high percentage of trading taking place off exchange in the UK in particular is something that I’m focused on, having been a trader.
“[We] are trying to make sure our investors are getting the tightest spreads and the most liquidity in our products.”
That is not the only challenge he faces in bringing ETFs to a wider UK audience.
Mr Abner says: “I think the biggest challenge in the UK, and in Europe in particular, is that it is very hard to be heard. There is a lot of noise in these markets and people get confused by the listings on the exchanges in all of the different currencies.
“The biggest challenge is boiling it down to exactly what the value proposition is that WisdomTree brings to investors, and helping them to see and understand that.”
WisdomTree itself has struggled in the face of an increasingly competitive domestic environment in recent months. US assets under management fell 22 per cent last year to $40bn (£32bn). But it has made progress in Europe, where assets rose 32 per cent to £1bn.
The appeal of passive products more broadly has been well documented. Investors attracted by the transparency and low cost of these offerings have in turn piled pressure on active providers to deliver the same.
“One of the biggest features of ETFs that all investors may not have even known they wanted but now love – the transparency of the portfolio – is a huge benefit. You know what assets your ETF holds at all times. Every day we publish a basket of the fund’s holdings, so investors can see assets flowing into and out of the fund,” says Mr Abner.
He adds: “If the biggest and the smallest investor – the largest pension fund and the smallest individual investor – are both buying the same ETF, they will be trading in the same product and in the same share class on the exchange, so there’s a tremendous benefit to that. First of all you’re bringing institutional-quality investment products to all investors, but there’s also product standardisation.
“In legacy systems of mutual funds, the biggest investors typically paid lower fees. There is a unitary fee structure in ETFs, which means that all investors pay the same amount. And that fee is disclosed, so we get back to transparency.”
Investors are not just benefiting from low costs associated with ETFs; the liquidity of these products is also part of their appeal.
Mr Abner explains: “Let’s use the biggest ETF, the S&P 500. That trades more shares per day, representing more of the underlying assets than you could trade if you were just trading each of the 500 stocks. The ETF becomes a liquidity vehicle, and that’s good for investors.
“Our Indian equity ETF in the US trades more shares on any given day than you could trade if you were buying Indian equities in India, so it generates more volume.”
ETFs are already a popular way for investors to access equities, so does Mr Abner see growing opportunities in asset classes such as fixed income and alternatives?
“I think there is going to be growth in the broad spectrum of ETF products, and in a variety of different asset classes you’ll see more and more assets going into the products,” he says.
“[Whichever] way that investors invested before, they will naturally want to invest in the same way using ETFs, and that’s how I see the future of the industry.”
One area of particular concern for Mr Abner is education, which he sees as lacking among advisers and investors in the UK. WisdomTree is part of the ETF Forum partnership set up last year to address this issue.
“I think there is a particular need among advisers in Europe for the education that I have brought to advisers in the US, and I think that’s going to continue to help the growth of this industry as a whole. I don’t see this type of education being brought to the market [in the UK],” he says.
“Advisers need to be spoken to in an intelligent manner, be presented with the details of the products’ mechanics and gain an understanding on the level of detail of how the products work. They can then go back to their end customers and explain why they are using ETFs and answer the questions which their clients may have.”
He continues: “It’s a very difficult time to be an active manager because the long-term performance numbers have not played out in terms of outperformance versus the indices. We have seen a large move towards more passive products and that coincides with investor demand for transparent products.
“We think that all of those dynamics play to the growth of the ETF industry and the growth of our strategies within that industry.”
