Stephen Cohen, Head of iShares EMEA at BlackRock, has commented on the position of ETFs six months into MiFID II, examining what has changed so far.
He writes: “With post-trade transparency, prior assumptions around higher ETF trading volumes have met expectations, to the benefit and comfort of many investors.
“MiFID II and greater cost sensitivity broadly have begun accelerating the shift towards fee-based advisory models, generating more attention on ETFs from distributors – the Italian market is an interesting case in point.”
Cohen comments that now that ETF trades are required to be reported, Euronext estimates the annual visible trading volume this year is USD2.3 trillion, versus USD1.3 trillion last year.
“Between January and June this year, on average 61 per cent more trading on the iShares UCITs range was visible – where it would not have been before MiFID came into force - and for fixed income this jumps to 74 per cent.”
The first ETFs domiciled in Europe were launched by iShares 18 years ago this month, Cohen writes, with two European equity ETFs listing on the Deutsche Börse on 11 April 2000, and a UK equities ETF listing on the London Stock Exchange on 28 April 2000.
“Turning 18 is an important milestone that signifies greater independence and self-sufficiency - this is an apt reflection of where the ETF industry is in Europe today. We may only be six months in but MiFID II is driving awareness about ETFs as a way to invest across asset classes and geographies by shining a light on costs, and mandating trade reporting. This will drive the next phase of growth in the European ETF industry.”
Cohen believes that at a time when people are becoming more cost sensitive. He writes that MiFID II is accelerating change by fundamentally upheaving the business of managing wealth. “It is accelerating fee-based wealth advisory models, where the advisor is paid by the investor and not the product, which opens up the advisory market to using ETFs as an efficient investment tool to deliver client outcomes.”
An intensifying shift to fee-based advisory models means higher indexing penetration and better value for the investor. Driven by demand for cost efficient, diversified portfolios by wealth managers, Cohen believes the regulation is propelling index and ETF asset usage in portfolios.
“In Italy, for example, the number of conversations with distributors wanting to know more about building ETF-based portfolios has increased significantly. In addition, we are seeing a consistent growth in the launch of wrapped products built with ETFs in the form of discretionary mandates and unit-linked products.
“MiFID II helps investors with broker and trading venue selection, which can mean tighter pricing. The cost of buying an ETF can vary, depending on the strategy, venue and broker chosen to execute the trade. Brokers that trade more volumes in a specific ETF are likely to provide tighter pricing. Increased trading on venues combined with increased MiFID transparency means that investors are able to find to find the most competitive pricing.”
Cohen notes that prior to these reporting requirements it was much harder for the investor to identify the most appropriate broker or venue on which to execute an order. There is now, he says, greater choice for investors trading large tickets and the attraction of ETFs for many institutional investors is the flexibility to trade large exposures quickly and easily.
Increased transparency of ETF trading volumes under MiFID is helping investors become comfortable that the industry is big and liquid enough to be an efficient way to invest, he says.
The market maker network is growing and they are an essential part of the ETF ecosystem. The more market makers in a trading ecosystem the easier it is for ETF investors to transact or in other words the more liquid the ETF market.
“In Europe, there are 25 per cent more registered market makers since MiFID II came into force. This is in part due to new obligations MIFID II imposed on liquidity providers to register with exchanges as market makers, in the context of ongoing growth expectations in ETF trading activity on European exchanges.”
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