Fund Managers Are Fearless as $1 Trillion ETF Wave Hits Europe

The exchange-traded fund revolution sweeping through U.S. money management is eliciting little more than a shrug from a European cohort arguably next in line for disruption.

Even after American products gathered nearly half a trillion dollars last year, mutual fund managers appear to be banking on long-standing industry barriers to stem the ETF tide across the Atlantic.

Four out of five European investors are “not concerned” about the growing popularity of these passive investing tools, according to a new Blackwater Search & Advisory poll. Nine out of 10 respondents said they “have no plans to launch ETFs anytime soon.”

The indifference comes despite the fact European ETFs have already gathered more than $1 trillion in assets. While that’s dwarfed by the $6 trillion U.S. market, the direction of travel appears inexorably toward the cheaper and more liquid instruments.

It all suggests old-school managers in the region may be in for a wake-up call.

Fund Managers Are Fearless as $1 Trillion ETF Wave Hits Europe

“The current set-up in Europe is like what the U.S. was 10 to 15 years ago,” said Athanasios Psarofagis, an analyst at Bloomberg Intelligence. “I’m sure if you asked those U.S. firms then, they weren’t scared either.”

A major factor behind Europe’s relaxed view of the ETF revolution comes down to fees, according to managers. Under what is known as the retrocession model widespread in the region, mutual funds deliver lucrative sales commissions to distributors -- a perk that low-fee ETFs don’t offer.

Distributors “will gravitate towards funds they get paid on,” said Psarofagis.

The retrocession model doesn’t exist in the U.S. and was ended in the U.K. in 2012. So long as it reigns in much of Europe, there’s little incentive for distributors to push ETFs, according to Psarofagis.

Taxes also play a role. ETFs in the U.S. enjoy an advantage over their mutual-fund peers, but that’s not the case in Europe. The region also has relatively few self-directed investors, which are the group most likely to adopt ETFs over mutual funds, according to the report.

Curiously, while the vast majority of the 100 managers surveyed had no intention of starting an ETF within the next two years, more than half think the competition will.

“Is it a case of ‘I am right and you are all wrong’ or is it a case of burying their head in the sand?” the survey authors wrote.

©2021 Bloomberg L.P.

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