It’s Not Just America. ETFs Are Invading the U.K. Market Too

(Bloomberg) -- Demand for British stocks is finally resurgent, but it looks like there’ll be no such revival for the nation’s embattled mutual funds: All that cash is headed to ETFs.

Investors have added $6 billion to Europe-listed exchange-traded funds tracking British assets since a breakthrough on Brexit in October, according to data compiled by Bloomberg Intelligence. Over that same period, active mutual funds saw their miserable run of withdrawals extend as investors pulled out $1.2 billion, EPFR Global data show.

It’s Not Just America. ETFs Are Invading the U.K. Market Too

The pattern will be familiar to most American observers. The same forces that have spurred the passive revolution in the U.S. -- disillusionment with managers, rising cost-consciousness, desire for transparency and more -- are now storming the U.K. Investors who have been yanking cash from mutual funds almost relentlessly since the 2016 referendum are apparently in no rush to go back.

“We tend to see that active managers aren’t so good when it comes to the FTSE 100 and being able to add value,” said Tristan Dolphin, senior associate in the investment strategy and research team at Stonehage Fleming. “We get more bang for our buck by taking a position in the FTSE 100 ETF.”

The seeds were planted even before Prime Minister Boris Johnson won parliamentary backing for his Brexit plan. While U.K. stocks struggled to find buyers in the wake of the referendum, the world’s biggest ETF tracking them proved more appealing. BlackRock Inc.’s iShares Core FTSE 100 fund has more than doubled since 2016 to £8.7 billion ($11.3 billion). The growth in assets far outpaces the total return of its underlying index.

It’s Not Just America. ETFs Are Invading the U.K. Market Too

Weixu Yan, investment manager at Close Brothers Asset Manager, can offer plenty of reasons these funds are winning fans. Three in particular, when it come to the BlackRock vehicle.

“Size, cost and exposure,” he said. “It’s the largest by assets under management, arguably the most liquid of its kind, and it’s one of the more cost-effective options available.”

Barriers Ahead

None of which means a U.S.-scale revolution is on the way. Passive strategies face barriers in Europe and the U.K., meaning the industry remains a fraction of the size of the $4.6 trillion American market. Retail investors are difficult to reach, there’s little in the way of derivatives and liquidity continues to be a challenge.

Peter Sleep at 7IM chose the Vanguard FTSE 250 fund over futures contracts to get exposure to U.K. midcaps, but he faced “a little difficulty taking the position because we wanted to buy a lot of the ETF.”

Meanwhile, not everyone is using the products for long-term allocation or going all-in on passive. James Klempster, director of investment management at Momentum Global, recently sold the firm’s position in the iShares FTSE 100 fund.

“We were using the ETF as a parking space to equitize the capital while we waited for a manager to come online,” he said. “In our portfolios, we end up with a combination of active and passive strategies, and I anticipate that to be the case going forward.”

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.