Martijn Rozemuller contributed to the recently published report “25 Years of European ETFs,” released by Funds Europe in partnership with BNP Paribas’ Securities Services. Daniel Gonzalez Fuster, Global Head of ETF Solutions EMEA at Securities Services, used the occasion to discuss with Martijn the main drivers of ETF growth in Europe and the critical success factors underpinning the market’s expansion.
Key differences between the European and US ETF markets: from infrastructure to investor education
Daniel Gonzalez Fuster: Welcome Martijn, and thank you for joining our fourth episode of ETFs Unwrapped. Given your experience at VanEck Europe and in the industry, what do you think makes the European ETF market different to the US one?
Martijn Rozemuller: I hope you have a bit of time because there will be a long answer! Actually the US and the European ETF markets couldn’t be more different.
The obvious difference is that Europe has many different languages. If you want to market your product, you need to have all the materials available in all of these different languages.
You also have to deal with different regulators. I have to give a couple of examples. In Belgium or Italy, the regulator wants to know upfront what you’re going to do. In many other countries, they will only let you know, after the commercial activity, whether it was okay or not.
Then, from a practical perspective, ETFs by nature are exchange-traded products. In the US, you have basically one exchange and all investors have access to it. In Europe, there are many exchanges. Most European professional investors will have access, probably, to most of them. But when you deal with retail investors, you need to be present on all of them, which obviously is an increase in cost. And it also is an increase in the effort and cost to have good liquidity providers in place and market makers available on those exchanges.
Last difference: a US retail investor is usually a little bit more sophisticated than a European one. Maybe for the simple fact that US citizens have been aware much longer that they need to take some form of control over their pension, over their future wealth. In Europe, that’s less common. People are starting to realise that over the last, maybe, 5 to 8 years.
We still have some catching up to do in Europe. At VanEck, there is some emphasis on education. It’s really important that we increase the level of knowledge, with European investors to make them see the benefits of ETFs.
So I did warn you, long answer. I hope it wasn’t too boring.
ETF market opportunities: picking the right countries in Europe
DG: thank you, Martijn. What are the main choices that European ETF issuers need to make when deciding to launch a new product?
MR: If you already have pan-European presence and a brand, it’s a little easier, because you have just to introduce the products on multiple exchanges and reach out to multiple distribution partners, in order to make sure that is a big bang.
But a lot of new issuers don’t have that infrastructure in place yet. So what country do we go to first? Which client group do we target first?
The best answer is to focus on the middle part of Europe. Anything in between the UK to the Netherlands, Germany, Switzerland, Italy, which are already quite receptive to ETFs. If you go further north or south, people know a little bit less about them. So it’s harder.
Are thematic ETFs the future of European ETF industry?
DG: in Funds Europe report, you describe yourself as being the craft beer of ETFs, as you have been launching very specific, innovative themes. How do you think other managers could best innovate in the European ETF space?
MR: it’s definitely the question I asked myself when I became part of VanEck about eight years ago!
AtThink ETFs, the company that I used to run before VanEck took over, we probably had 12 ETFs in total. Most of them were either very generic, very broad and general exposure, and some of them were a very specific theme, like gold miners.
One of the first ETFs that really took off after VanEck acquired Think ETFs was an ETF that was targeting the video gaming and e-sports industry. Our US colleagues had launched it, I guess in 2019. We thought it was fun and you can have some nice short videos to promote it. [In 2020] A lot of people were working from home. I guess more people played video games than in the year before. And they had more time to think about their investments. So, a combination of different factors made this product a big success.
We already knew that we were not going to launch the next S&P 500 or the next MSCI World Index ETF, because that those products were already available in many different shapes and forms. And the only difference was the fee. So, it’s going to be very hard to get any market share. And it’s going to be at a very low revenue.
So we really believe in diversification. If we are able to get these crafted ETFs and we make them pure play, we should have the ability to bring ETFs to market that have companies in them that would not be in your typical S&P 500 or MSCI World ETF.
We are adding value in the sense that we add diversification.
If we find interesting themes early enough, people who start using them will benefit from it, if it turns out to be the long-term trend that we hope to discover.
That’s why we like to refer to ourselves as the craft beer, because if you look at S&P 500 or MSCI, you could probably compare that to the big brands. But we’d like to be more like the smaller ones, and maybe even the monastery breweries of the ETF industry.
Navigating the biggest challenges and untapped opportunities in the European ETF landscape
DG: I really like the analogy. Innovation is about thinking differently. As we are servicing VanEck’s ETFs in Brazil, we do see on a day-to-day basis the constant quest for innovation that you have. How do you see the ETF market evolving? What are the main challenges and opportunities?
MJ: Let’s start with opportunities. There are a lot of opportunities in the European ETF markets going forward, mainly because the adoption rate is still low. Earlier, I mentioned the ‘middle band’ of Europe from UK to Netherlands, Germany, Switzerland, Italy.
If you look further north and south, there is even more opportunity. France is a nice example. France has been a positive surprise to us last year. The rate at which French investors are opening up to ETFs is better than I expected. I expect something similar for Spain and the Nordics.
If I speak personally, there’s a couple of things that I’m a little bit mindful of.
The ETF as a wrapper can be used for many things. In essence, it’s best used with passive strategies: being very transparent at very reasonable cost.
But there’s the seduction to put other types of investment exposure in it. Over the last 12 to 18 months, we’ve heard a lot about active strategies being wrapped in ETFs. I do think you have to be careful how you position it and how you bring it to market.
If you want to have an active strategy, it’s going to be a little bit more difficult to wrap it in an ETF with intraday liquidity. You need to be mindful of the cost.
And this goes even a little bit further when you think about leveraged or inverse products. Now I’m sure there is a place in the market somewhere for them. Over the last decades, most investors have a hard time predicting the markets in the short term. Although it may be very well enticing, because if you do it right. So, I believe that leveraged or inverse products should not be wrapped in ETFs.
Last example may be private markets. There’s a lot of talk about those assets being wrapped in ETFs. It’s not publicly listed. And that makes the liquidity a big challenge, if you want to wrap it in an ETF. There are ways to maybe mitigate that. But it’ll never be perfect.
My view is if something is not really suitable for an ETF, find another way to bring it to the customer. The challenge for the ETF industry could be to make sure that there’s not a lot of confusion created by bringing products to market that are basically labelled as an ETF, but could move or behave very differently than what people expect of an ETF.
DG: Thanks, Martijn. Preserving the nature of ETFs while allowing also for more active strategies are definitely important. It was very interesting to hear your insights on the complexity of the European ETF market and how important innovation is to succeed. So thanks again for your time.
Let me thank also all our listeners and I hope you have enjoyed this fourth episode of ‘ETFs Unwrapped’!