ETFs pave a new way for European investment funds

ETFs: the new distribution channels

Ten years ago, the car industry realised it had to evolve from ‘building cars’ to ‘providing mobility solutions’.

We are at this exact inflection point in the European asset management industry. ETFs have shifted from ‘replicating indexes’ to ‘providing liquid and efficient investment solutions”, as they have evolved from an investment product to a true distribution channel. Surely more choice and lower fees can only be good news for the European investment market?

Launching an ETF? Rethink everything

At BNP Paribas, we believe the ETF industry is a crucial new pathway for asset managers, but only if the industry can scale effectively, improve its liquidity, and deliver clear benefits for end investors. To do so, asset managers must evolve their distribution strategies and build a new ecosystem with the right foundations and supporting capabilities.

Even once a manager has decided on the best profile and structure of ETF to deploy their business strategy and target investors, they must also align and integrate all the processes throughout their supply chain. In the car industry, the production line for the petrol car is not the same as for the electric. Similarly, the value chain for ETFs is completely different to the classic mutual fund.

As Europe’s largest custodian and asset servicer, we work with over 400 managers globally to launch and administer different fund ranges and structures. Yet even we have been surprised by the level of interest in ETFs by our European clients, and the steepness of the learning curve that they face.

The question is no longer ‘should I launch an ETF’, but ‘how should I do it?’, and more importantly ‘who do I need’?

European fragmentation as a strength

Europe has historically grappled with a lack of standardisation, which leads to greater complexity in post-trade processes and sub-optimal liquidity. However, this variance can be a virtue for ETFs. Managers can choose from multiple fund jurisdictions and market listings, and benefit from regional competition, where the major domiciles are evolving to attract issuers:

• While Ireland still dominates with 78% of EU-domiciled ETF assets^[1], the proportion of Luxembourg-domiciled ETFs has grown in the last 3 years.
• Both Irish and Luxembourg authorities have been reviewing their regimes to reduce barriers to entry. Last year, the Central Bank of Ireland confirmed that listed ETF share classes would no longer need to include ‘ETF’ in the fund name^[2], aligning with Luxembourg.
• While in Luxembourg, new tax incentives on actively managed ETFs^[3] have been implemented in 2025, which reduces the associated costs for investors

A wide choice of different fund domiciles and cross-listing combinations become available for ETFs issuers, meaning managers would need to meet multiple local regulations and market requirements. At BNP Paribas, we are seeing more newcomers seeking for advice and support to launch ETFs.

This goes beyond administrative support, but broader support in the design, structure, management and distribution of these products.

 Local expertise, market connectivity and global reach hence are more important than ever.

Greater ETF sophistication requires greater connectivity

The active versus passive, synthetic versus physical debate continues to heat up. Issuers might be tempted to focus solely on the design of the ETF. But we cannot stress enough the importance of developing the right infrastructure.

Some of the best practices are:

1. Apply true diligence to appointing an Authorized Participant (AP):

They are critical to liquidity of the ETFs. What is the AP’s level of expertise and their track record? These factors are key to achieving competitive spreads.

2. Look at your servicing set-up:

many of these capabilities – fund administration, custody, etc. – have become a commoditised service, but ETFs require a fresh approach. Can your service provider go beyond the basic servicing capabilities? Can they support your product launches, seeding needs and distribution ambitions?

3. Assess the connectivity of your service provider with the primary market:

as ETF investors are primarily looking for liquidity, having a service provider who can streamline your interactions with A Ps can bring huge efficiencies, enabling both scale and automation. This is what BNP Paribas, across Global Markets and Securities Services, has developed for several clients, acting as AP and market maker as well as custodian and asset servicer. An experienced, all-in-one partner can help ETF issuers to navigate various liquidity and regulatory rules, allowing them to focus on their business priorities.

The right path for European ETFs: collaboration, liquidity, and a seamless ecosystem

Coming back to the initial analogy, the best car might not be the cheapest, or the fastest, but the one that brings you seamlessly and safely from A to B. A successful future for European ETFs relies on closer collaboration to overcome market fragmentation, develop deeper liquidity and a seamless ecosystem that makes life easier for issuers and their clients. This is our goal at BNP Paribas: bringing issuers and investors together in the new frontier for European ETFs.

This article was originally published in Funds Europe “25 Years of European ETFs – Funds Europe” report.

[1] Confidence is soaring as Global Exchange-Traded Funds are on a path to reach US$30 trillion by 2029

[2] https://www.dilloneustace.com/insights/central-bank-of-ireland-confirms-that-etf-share-classes-may-be-established-within-non-etf-ucits/

[3] The Rising Appeal of Active ETFs – Luxembourg for Finance