ETF evolution

There has been a lot of innovation within the Ucits ETF structure and products have developed beyond offering benchmark, equity exposure, into a variety of niche areas. The ETFM Innovation Roundtable asks where there is still room for growth and how the ETF market can continue to innovate

Clare Dickinson, editor, ETFM: Is there room for more vanilla products within the European market?

Eleanor Hope-Bell, head of Northern Europe for SPDR ETFs: When we look at developing products, we’re talking to our clients and engaging our clients. What they’re telling us is more about going back to basics and making sure that there are core products for them to invest in, rather than the fringe or esoteric products.
We mustn’t forget that we’re still very much in the early stages in Europe. In terms of all the mutual fund assets, we’re a drop in the ocean; ETF assets are something like 3% of the total assets. So there is lots of room for growth but we believe it’s in the core space.

Michael John Lytle, managing director at Source: I think part of what people focus on when they look at the European markets is fragmentation. They say well, where is the innovation in Europe taking us? Is it just creating a lot more product than investors have appetite for?

Ultimately, when people look at the ETF toolbox, they need it to solve the problems of the basic beta exposure before it starts to expand out and do more creative things.

The problems in that space right now are to do with the multitude of products doing exactly the same thing. Investors are having a hard time determining of the 19 different Eurostoxx 50 products, which one are they supposed to buy?

The challenge is for the European market to become more efficient in delivering basic benchmarks. Then, in a very measured way, create some opportunities for index innovation but not in this vast proliferation.

Clare Dickinson: Where do you think there is room to take it that step further?

Michael John Lytle: I believe that active and ETF is not an oxymoron. There’s an opportunity to put some active structures into ETFs. There’s some opportunities with delivering certain types of active structures but it’s not unconstrained active structures, it’s a bit more of what I call beta plus. It’s giving people exposure to a market but with a twist that might enhance their overall exposure to that market.

Eleanor Hope-Bell: There’s a lot of talk around active and then whether it’s alternative beta or fundamental indexing. The reality is the growth rates are high, there’s a lot of chatter about it, the demand isn’t there; I think less than 1% of the total invested assets in terms of ETFs are actually in active ETFs.