Olly, I take the opposite view. To me, the growth rate of ETFs in Europe is a triumph.
The proliferation of funds and listings in Europe is simply a reflection of the fact that this is a single market but also a disparate region of sovereign states, differing cultures and many languages.
That’s not going to change, so we have to accept the market as it is. But, given all these differences, the fact that a single, widely accepted fund architecture (UCITS) has emerged is a credit to the designers of the regulations. And UCITS has rapidly gained acceptance as a mark of quality well beyond Europe: it’s becoming a sought-after feature for investors in Asia and Latin America, for example.
The complexities on the trading side that result from multiple exchanges and transaction platforms, together with different settlement systems, are also largely the result of history. There’s no doubt that inefficiencies do remain, but as we heard at the Inside ETFs Europe conference earlier this week, some of the best minds in the business are currently working on improving the infrastructure.
Coincidentally, the Committee of European Securities Regulators (CESR) released a report calling for greater equity market transparency on the second day of our conference. CESR’s ongoing review of the 2007 Markets in Financial Instruments Directive (MiFID) is likely to lead to greater pre- and post-trade transparency in European ETFs as well (since ETFs are traded like shares), something which can only be good news as it should lead to lower trading costs. Here’s the FT’s write-up of the latest developments.
Things can go wrong, of course. To me, the biggest risk is the potential fallout from the worsening sovereign debt problems across the region. The yield on ten-year Greek bonds has just hit a new high, signalling that investors don’t believe the country can balance its books. If Greece is forced to restructure its debt (put bluntly, default), other countries will come under severe strain and we could well see a return to nationalism and protectionism. Efforts to improve continent-wide regulations might then not reach any conclusion.
For the time being, however, those responsible for the infrastructure that supports the European ETF market are making the right noises. Eddy Wymeersch, CESR chairman, said this week that “ensuring that the regulatory framework keeps pace with the changing shape of financial markets is key.”
Put the right framework in place and everything else will follow, in my opinion. Fat commissions for distributors of financial products are already on the way out, and better transparency on how ETFs are structured and traded should only help speed up competitive processes.
Great prizes are on offer to the winners of this race, while inefficient and poor-value fund management businesses will lose out. I think a lot of people can see the way things are heading – and that’s in the direction of ETFs. The attendance at the Inside ETFs Europe conference this week was, in my view, testament to that trend.