2021 is yet another record year for the Exchange Traded Funds industry in terms of asset levels and net flows. But what is next and can this incredible growth story continue? CACEIS experts sketch out the ETF landscape and how they can support stakeholders for the future of the asset management industry.
“Since the first ETF was launched in the early 90s, the industry has grown to now over $10 Trillion. Indeed, CACEIS has seen our ETF Servicing business grow to over €90 billion in EMEA, making us the 2nd largest service provider to ETF managers in the market. So why are ETFs so popular? Well, the easiest answer is probably that they were at the right place at the right time” explains Robert Rushe, Senior Expert – ETF Solutions at CACEIS.
Weighed down by decades of legacy processes, vested interests and multiple layers of red tape, the mutual fund industry struggled to keep pace with the changing digital landscape of the late 1990s. It was an industry that was ripe for disruption or even a revolution! Then came the ETF. A product that removed all the intermediaries and brought the mutual fund directly to the door of the investor, through the use of the stock exchange. Gone was the need to go through a long change of counterparties and having to pay for the privilege. Also, gone was the need for all the paperwork or having to wait 24 hours for a dealing confirmation. “You could now invest in a fund just as easily as it was to buy an equity. This, coinciding with the technological revolution since the creation of the Internet, has positioned ETFs as the perfect product at the perfect time” adds Robert Rushe.
When you ask someone to talk about ETFs the will usually mention that they are Index Trackers, low cost, transparent, tax efficient etc. This is mostly true of today’s ETF products, but that’s not the main driver of their growth. Especially going forward. The reality is they just simplify the investment process. In the modern world, where everyone has an app for everything, the ETF structure just works.
“If you have a broker app on your phone you now have instant access to over 5,000 ETF funds. These funds will cover every asset class, country, sector, theme or strategy. Just one click for instant execution with no paperwork or delays. In fact, ETFs now form the foundations of a large number of asset and wealth manager businesses due to their simplicity” explains Rob Rushe.
So what’s next? While Index tracking products have long been the focus of the ETF structure, it’s probably fair to say we are close to saturation point in terms of the number of different indices we can create to track. Also, it’s worth remembering that the ETF structure is not defined by the strategy, it’s the underlying technology, the “wrapper”, that can be used to deliver any liquid investment strategy. This brings us to the topic of Active ETFs.
While the Active ETF is not a new concept, it has always struggled to see the success of the passive products. This is probably due to the success of Passive investing over the past 20 years which has led to active managers seeing the ETF as a threat, instead of an opportunity. They have focused on the more traditional features of an ETF (transparency, low fees, intra-day tradability) and thought there was no real driver to putting with products in the ETF wrapper.
“However, this is changing. In the US, thanks to the creation of the Non-Transparent Active ETF, we are now starting to see a big shift to Active products. The ETF structure also brings additional Tax benefits over a traditional mutual fund in the US market, which is a big driver for this push. You could make the argument that the European ETF structure does not have the same tax advantages as the US so we will not see the same take up of the Active structure here. However, this would be a big mistake” completes Robert Rushe.
As we have seen, the success of the ETF is all about investor access. The market is fundamentally changing. Investors are not being drawn to the ETF market anymore, that’s now where they are. Not embracing the ETF structure is like a consumer goods retailer not selling their products online. They might survive if all their competitors do the same, but once one makes the move they all have to or they face extinction.
The good news is that it’s not too late. We are still only at the beginning of the Active ETF journey. For those new to the ETF space, taking the first steps might seem like a daunting task. Indeed, there is a lot to consider. However, with the right guidance, it is not as difficult as it might seem.
“We believe the ETF Industry will continue to be a key growth area for many years to come” says Dimitri Sakkis, Group Head of Operational Line - Fund Distribution Services & ETF Services at CACEIS. "As a result we are continuing to put significant investment into our ETF servicing offer. In 2021 we successfully launched our innovative ETF dealing platform, TEEPI ETF. This is a state-of-the-art dealing portal with a bespoke service for authorised participants to access the ETF primary market. In addition, we have created a new dedicated business line to support our ETF clients and ensuring that all aspects of service delivery is tailored to an ETF’s requirements”.
With its mix of features, CACEIS’ TEEPI ETF platform provides market participants with flexibility, transparency and greater capacity to play an active role in the market.
CACEIS is therefore very well positioned share the benefit of its 20+ years’ ETF experience and market-leading solutions to provide expert support to clients.
“We will work with new ETF issuers to ensure they understand, not just what is handled by CACEIS, but also how they might need to change their processes for an ETF product. We will also provide the necessary introductions and guidance to all parties within the ETF market ecosystem. By working with our clients throughout the entire product-structuring lifecycle, we ensure they can deliver their preferred strategy to the ETF market and their investors” concludes Robert Rushe.