ETFs to drive passive’s market share in Europe to 25% by 2025, finds Moody’s

Nov 19th, 2018 | By | Category: ETF and Index News

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Passive funds will account for around a quarter of the fund industry’s total assets under management in Europe by 2025, driven by strong demand for ETFs from institutional and retail investors. That’s the finding of Moody’s which investigated the potential growth path of the passive funds industry in Europe.

Marina Cremonese, Vice President and Senior Analyst at Moody's.

Marina Cremonese, Vice President and Senior Analyst at Moody’s.

Marina Cremonese, Vice President and Senior Analyst at Moody’s, commented, “ETFs will become a core part of institutional investor portfolios in the next five to ten years due to their flexibility, liquidity and competitive cost.

“Institutional investors can use them for tactical adjustments, as a hedging and diversification tool, and increasingly as a component of a broader investment solution.”

In its base-case scenario, Moody’s expects the wider passive fund sector, including tracker funds, to grow to 22% of total AUM by 2025, up from 14% at year end-2017. The firm’s fast-case scenario sees passive’s market share reaching 27% by the same time.

In the base-case and fast-case scenarios, ETFs’ share of total fund AUM would rise to approximately 11% and 14% respectively, up from 6.2% at the end of 2017. This would help close the gap with the US where ETFs’ share of total AUM stood at around 18% as of the end of last year.

Moody’s predicts that asset managers with strong passive capabilities are likely to continue growing their market share. It specifically points to Europe’s largest ETF providers – BlackRock, DWS, and Lyxor – as prime candidates to benefit from this growth phase.

Moody’s further predicts a key driver in the future growth of passive’s market share will be greater usage of ETFs by retail investors – a trend that has thus far been much weaker in Europe than in the US. It notes that one of the main reasons for this difference between regions is that European banks, which have dominated fund distribution, have prioritized their own relatively costly products.

This gap in adoption rates is likely to close, however, says Moody’s, driven by the growth of defined contribution pensions in Europe and new regulations such as MIFID II.

MIFID II, which took effect in January 2018, provides better visibility over active fund fees, and has banned funds from paying commission to financial advisors. Moody’s notes this will likely push retail investors towards cheaper passive funds, including ETFs, just as these become more widely available through investment platforms and robo-advisors.

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