Europe’s digital investment platforms raise ETF demand
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Digital investment platforms are set to drive the rapid adoption of exchange traded funds by European investors, according to industry forecasts based on the take-up of new channels to access equity markets.
BlackRock, the world’s largest asset manager, estimates that there are around 65mn retail investors across Europe but only 5 per cent of “wealth assets” are currently invested through digital platforms.
But the sudden rise of so-called digital “neobrokers” on the continent is already changing behaviour — most notably in Germany — and helping to turbocharge ETF adoption.
Trade Republic — founded in 2015 and now Europe’s largest neobroker — has gained more than 1mn customers across 17 European countries. Other big-name relative newcomers to the European investment scene, such as rival neobrokers Scalable Capital and Bux, are also attracting investors interested in exchange traded products.
“Within Europe, Germany is one of the fastest-growing and biggest potential markets,” says PwC in its recently published report on the ETF industry. “Growth is being driven by the rise of self-directed investors and ETF savings plans,” the report notes.
ETF savings plans are simply a regular investment product, whereby investors commit to putting a set amount each month into one or more funds. As such, the plans’ huge surge in popularity in Germany has left many in the industry surprised, because there is no tax advantage to investing in this way.
Scalable Capital said it reached 1mn separate ETF savings plans earlier this year, and two out of three of its investors use ETFs. It also found that, the younger the investor, the more popular this form of investment. At the end of January, almost three-quarters of the 18- to 26-year-olds using its site invested in ETFs; the proportion drops to 60 per cent for those over the age of 65.
ETF providers say neobrokers and digital platforms could be a game-changer. iShares expects 10mn new investors to use its ETFs in Europe in the next 10 years and reckons assets handled by digital wealth platforms will reach $500bn by 2026.
“Digital investment platforms are driving a wave of ETF adoption in Europe,” says Timo Toenges, head of iShares Emea digital wealth business. And PwC’s report suggests some reasons why: “The digitisation of ETF distribution can lower costs, improve accessibility and attract new investors.”
This use of digital “execution only” platforms — which allow clients to invest without advice from an intermediary — also seems part of a wider global phenomenon.
In its latest ETF distribution report, Blackwater Search & Advisory, a consultancy, says institutions may still dominate in most areas of the world, but there is clear appetite for going digital in certain regions.
In the US, where there is stronger retail participation in investment, the consultants noted the increasing importance of social media in influencing investment decisions.
Meanwhile, in Asia, as in Europe, online trading platforms and robo-advisers — which can select a portfolio for investors who answer questions on objectives and risk tolerance — were reported to be “in rapid expansion mode”.
But it is in Europe where digital platforms are described as the “belle of the ball”.
“Down the line, perhaps beyond the next 12 months and up to five years, the biggest growth is going to come from retail and the majority of European ETF issuers will target retail channels to harness this growth,” the authors of the report noted.
Caroline Baron, head of ETF distribution Emea, for investment group Franklin Templeton, thinks activity is changing rapidly even in “closed-architecture” countries such as France, where it has been so tax advantageous to invest via an insurance wrapper that product distribution is heavily influenced by insurers. Now, advocacy organisation Better Finance is pointing out that these insurance wrappers can result in much higher fees, which eat into future returns.
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Still, Baron thinks it might be wise to adopt a cautious approach in markets where investors are not accustomed to self-directed investment.
“Perhaps the solutions need to be adapted slightly — for example, offering portfolios of funds and ETFs instead of leaving the investors build their portfolios themselves as many may not know where to start,” she says. “And this is where distributors and financial advisers can add value.”
Either way, though, the new frontier for novice investors to navigate will move from fund composition to metrics such as exit fees, platform management fees, and trading fees.
Regulators will have to grapple with how to compel new digital platforms to be transparent on where they are making their money. These revenue sources can include platform fees, the spreads between the buying and selling prices quoted for trades, and “payment for order flow” — a practice that allows brokers to accept payments from market makers for directing trades to them, enabling headline brokerage fees to be kept low.