The Dark Side Of The European ETF Industry

Within the current market environment in the European ETF industry where the estimated net inflows are at a record high level and assets under management (AUM) are moving from one all-time-high to the next, one may think that it must be easy for ETF promoters to participate from the trend toward ETFs.Frankly speaking, nothing could be farther from the truth than such a statement. The European ETF industry is highly concentrated at the assets under management and the fund flows level. This means that the vast majority of assets are held by a small number of ETF promoters. The same is true for the estimated net flows.In fact, the largest 10 ETF promoters in Europe held 94.25% of the assets under management at the end of October 2024. This means in turn the other 50 ETF promoters in the European ETF industry only held 5.75% of the AUM. It looks even worse with regard to the estimated fund flows, as the 10 promoters with the highest estimated inflows accounted for 96.98% of the overall inflows for the first 10 months of 2024. Only 14 of the 60 ETF promoters active in the European ETF industry enjoyed inflows of more than EUR 1.0 bn. Even worse, 20 of the 60 ETF promoters in Europe faced outflows (EUR 8.0 bn overall) within a market environment that led to record inflows into ETFs in Europe.Graph 1: Market Share of the 10 largest ETF Promoter in Europe (October 31, 2024)Source: LSEG LipperThese numbers clearly underpin the point that it takes much more than just launching an ETF to participate from the growth of the European ETF industry. To be honest, it takes much more to succeed in the European ETF industry. Even asset managers that managed to fulfill all standard requirements (sales registration in the major markets, listing on multiple exchanges, cooperation with a sufficient number of liquidity providers, a relevant investment objective, and high transparency of the product) struggle to capture inflows in their products.So, what went wrong for these ETF promoters? First of all, it needs to be said the vast majority of the flows were captured by asset managers that are somewhat household names in the asset management industry. This means that smaller or unknown ETF promoters need to launch respective marketing campaigns to enhance their branding. Secondly, plain vanilla index strategies such as the ETFs on the S&P 500 captured high inflows, which means that thematic or niche products may not do the trick for innovative ETF promoters since European investors prefer rather standard products. That said, the launch of plain vanilla ETFs on standard indices does not make much sense for a new ETF promoter since there is a high competition in these market segments which have brought the management fees down, which means an ETF promoter needs high AUM in these products to earn money. In addition, smaller ETF promoter may not have enough sales staff to cover all important markets and investor groups.To sum the above up, the dark side of the European ETF industry is the fact that it is very hard for new ETF promoters to succeed in the European ETF industry, as it needs a lot of resources and the willingness to spend a fortune to build a profitable ETF business in Europe. Therefore entering the European ETF industry isn’t easy at all, even if the respective promoter may has taken all mandatory and voluntary steps, it does not mean that success is guaranteed.More By This Author:What Is A Yield Curve And How Is It Used By Investors? S&P 500 Earnings Dashboard 24Q3 – Friday, Nov. 29Is The Concentration Of The Assets Under Custody A Threat For The Global ETF Industry?