Detlef Glow, Refinitiv

Lipper Refinitiv examines European ETF industry


Latest Lipper Refinitiv figures reveal that the promoters of ETFs in Europe enjoyed net inflows for June. Detlef Glow (pictured), head of EMEA research at Refinitiv, writes that these led, in combination with a positive performance of the underlying markets, to an increase in the assets under management in the European ETF industry.
 
Glow has also published a note on consolidation in the European ETF industry. More detail on the June figures reveals that assets under management in the European ETF industry increased from EUR721.4 billion as of May 31, 2019, to EUR746.7 billion at the end of June. The increase of EUR25.4 billion for June was driven by the performance of the underlying markets (+EUR22.5 billion), while net sales contributed inflows of EUR2.9 billion to assets under management in the European ETF segment, Glow says.
 
With regard to the overall number of products, Glow writes that it was not surprising equity funds (EUR510.8 billion) held the majority of the assets, followed by bond funds (EUR203.9 billion), commodity products (EUR19.3 billion), alternative UCITS products (EUR6.4 billion), money market funds (EUR4.5 billion), mixed-asset funds (EUR1.8 billion), and ‘other’ funds (EUR0.2 billion).
 
The level of estimated net inflows into ETFs stood below average for June. In more detail, the net inflows in the European ETF industry for June (+EUR2.9 billion) were below the monthly rolling 12-month average (+EUR4.6 billion).
 
Glow writes that the flows into ETFs were a sign that investors had returned to the markets despite an increased volatility in stock markets globally. “That said, it was surprising bond ETFs were again the asset type with the highest net inflows (+EUR6.0 billion), followed by money market ETFs (+EUR0.9 billion) and mixed-asset ETFs (+EUR0.05 billion). Conversely, equity ETFs (-EUR3.5 billion) faced the highest outflows in the European ETF segment, bettered by alternative UCITS ETFs (-EUR0.3 billion), commodity ETFs (-EUR0.1 billion), and ‘other’ ETFs (-EUR0.03 billion).
 
This flow pattern drove the overall net flows to +EUR36.1 billion for 2019. Glow has also commented on consolidation within the European ETF industry. He writes that while there are a lot of predictions of wider consolidation in the European ETF market, there has been no concurrent general consolidation taking place in the European ETF industry.
 
“While some ETFs were closed and some ETF promoters were bought by others, in general consolidation would mean there would be fewer promoters or ETFs afterward. This might have been the case right after the single actions were taken, but on a calendar-year basis it hasn’t been true at all,” Glow writes.
 
“That said, a consolidation is a sign of a maturing market and would therefore not be a bad sign for the industry. Another fact that speaks against a consolidation in the European ETF industry in the near future is its steady growth in assets under management, mainly driven by net new sales.
 
“These net new sales are the fuel for new product offerings and also for the launch of new ETF promoters, since active asset managers want to capture their share of this growing market. On the other hand, it is a fact that the flows and assets under management in the European ETF industry are highly concentrated, and even though some newly launched ETFs are able to gather some hundred million euros in assets under management very quickly, others struggle to gather any assets at all.”
 
Glow recognises that investors don’t want to invest in ETFs that might close very quickly, and examines the ETF industry on a fund-by-fund basis to see if there are some funds that are more likely to be closed than others.
 
“In other words, since investors want to stay away from graveyard funds, they might want to see a list of ETFs that may be liquidated or merged in the near future.
 
“Since profitability is a key measure for companies, it is fair from my point of view to assume that ETF promoters want to run ETFs that are profitable for them. In this regard it would be good to know how many assets under management an ETF needs to be profitable.”
 
Despite the fact that many industry participants mention EUR100 million in assets under management as a general breakeven amount, Glow believes this sum may vary widely between the different ETF promoters, depending on the setup of the promoters and the ETFs themselves.
 
“Another point that needs to be taken into consideration is the age of a given ETF, since the majority of ETFs can’t be blockbusters that gather a billion euros within the first three months after launch; they may need some time to get to their breakeven point. Even though it appears a bit long from my point of view, three years is a good period to see whether an ETF has gathered investor attention or not.”
 
Glow’s findings reveal that by the end of May 2017 there were 2,183 instruments (primary funds and convenience-share classes) listed as ETFs in Europe, on the Lipper database and by filtering all ETFs that didn’t have more than EUR100 million in assets under management at the end of each of the last 36 months (June 30, 2014–May 31, 2017), unveils that there were 404 ETFs registered for sale in Europe that never had assets under management above EUR100 million anytime in the last three years.
 
Glow writes: “This meant that 18.5 per cent of the ETFs registered for sales in Europe were at risk of being closed by the ETF promoters. If all these funds were to be closed within a short time horizon, one could speak of a consolidation; it would mean the number of products available to investors was shrinking. The impact of closing these ETFs could not be neglected, since these 404 ETFs hold a combined approximately EUR11.2 billion in assets under management.
 
“Nevertheless, not all of these ETFs are at risk of being merged or liquidated in the near future, since they might be profitable because of the efficient setup of the promoter or because they are needed to complement the product offering of a promoter. This is especially true for ETFs in equity sectors or duration bands.”
 
In this regard, Glow and his team analysed the ETFs registered for sales in Europe by implementing a EUR50-million threshold filter. This analysis showed there were 249 ETFs available to investors in Europe that did not hold more than EUR50 million in assets under management anytime during the last 36 months. The combined assets under management of these ETFs at the end of May 2017 stood at EUR3.8 billion.
 
“Since even EUR50 million in assets under management might be enough to be profitable, we analysed the ETFs registered for sale in Europe by implementing a EUR10-million- threshold filter. This analysis showed there were still 40 ETFs available to investors in Europe that did not hold more than EUR10 million in assets under management anytime over the last 36 months.
 
“Although some of these funds were complementary for the product ranges of the respective promoters and some were sector funds where the assets under management should increase sharply once the sector gains favourability with investors and the promoters can harvest their first-mover advantage, these funds are at a high risk of been merged or liquidated sooner or later.
 
The closure of these 40 ETFs would in my opinion still not mark a consolidation, since the ETF promoters may launch a similar number of products over the same or a slightly extended timeframe. I would see such a cleanup of product ranges as a sign of the maturity of the ETF industry and not a consolidation,” Glow concludes.
 

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