7387 an american bull in a dutch china shop year 2010 month 04 itemid 127

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An American Bull In A Dutch China Shop

Written by Olivier Ludwig

  
April 13, 2010 19:06 (CET)

I landed at Schiphol Airport in Amsterdam and had no idea what I was getting into. Don’t get me wrong, I love the city, and I love Europe. I even have a French passport.

But hearing all about Europe’s way of doing ETFs at the Inside Europe ETFs Conference made me realize that we’ve got it easy back in the U.S. Europe has less than a third of the $820 billion in assets gathered in the States, but a lot more funds (a total of 1,259, compared to 981 in the U.S. as of March 31).

How did this happen? It’s largely because most European financial institutions are going it alone, launching their own products and using their own distribution networks. That leads to an ETF landscape littered with 19 different ETFs designed to match returns of the broad-based EuroStoxx 50 index. That’s 19 funds with an average of around €1 billion in assets each, instead of one big fund such as State Street’s S&P 500 ETF (NYSEArca: SPY) with $77 billion.

What’s more, each is listed on as many as eight exchanges across the continent, making 55 listings of the same fund in Europe! Talk about inefficient. And since we’re talking listings, let’s take up a related question: How is it that the NYSE got to be so important on turf so far from its home in the Big Apple, via its takeover of Euronext in 2007? I’m told it revolves around some Franco-German disagreement about jurisdiction and influence, but that sounds like a buttoned-down, dressed-in-a-business-suit version of an old tale to me.

I realize that Europe isn’t America, and, truth be told, I’m mostly pretty happy about that. And the last thing any European wants to hear from an American is a history lesson. But coming from the land where “the customer is king,” I can’t help taking this discussion one step further.

None of these banks, each with its own distribution network, is really motivated to compete on price. You hear stories of people in Europe walking into their local bank looking for some equivalent of SSgA’s SPY, and the poor European investor – whether in Madrid, Paris or elsewhere – will be lucky to get out of there without getting fleeced by some ridiculous annual wrap fee to the tune of 300 basis points! Using a discount broker in the States, that’d cost me 12 basis points in annual management fees plus a commission of about $8.

It certainly doesn’t help that most ETF investing in Europe is done by large institutions, compared to a U.S. market that’s split more or less evenly between institutional and retail clients. There was a lot of talk at the Inside Europe ETFs Conference about “defragmenting” the European market to help jump-start the retail side of an ETF market that, on paper at least, makes every bit as much sense in Europe as it does in the States.

The ETF market in Europe is certainly less mature than the one in the U.S., so perhaps “giving time some time,” to quote the late French President Mitterrand, is perfectly sensible. On the other hand, unless some angry investors in Paris or elsewhere take to the barricades and demand better treatment from their friendly neighborhood banker, all this talk of growth in ETFs in Europe might just be a pipe dream.

 

 

 


The views expressed by those blogging are for informational purposes only and should not be construed as a recommendation for any security.
 

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