ETFs Offer Hope In Europe, But…

In contrast to your polemic, Olly, I think ETFs are changing the game in Europe.

A lot of what you wrote about the failures of the European ETF market is true. Having 19 ETFs tied to the same index is inefficient and unfortunate. It fractures liquidity and drives up the cost of trading. ETFs are one area where big sometimes is better, and I’d take one or two big S&P 500 funds over 19 copycat funds any day of the week.

Paul Amery gives Europe a pass in his riposte to your comments, arguing that we just have to accept the fractured European ETF market “as it is.” I think that’s letting ETF issuers off too easily.

I’ve had European ETF issuers say to me point blank that they launched me-too funds because they thought they could push those funds onto existing clients in quid pro quo agreements to balance out broader relationships. That makes me queasy: I’d rather have funds compete on merit. And if competition took place on merit, there would be fewer copycat products in Europe.

Still, the net effect of ETFs in Europe—as in the U.S.—is overwhelmingly positive. As you suggest, many European investors are tied to their local banks and are willing to accept whatever absurdly priced funds their local banks have to offer, such as the 300 basis point S&P 500 fund you mention in your article. Now, thanks to ETFs, they have a choice: they can go to an exchange and buy the same exposure for one-tenth of the price.

As much as we need a consolidation of listings and volume in Europe, what we really need is more education. If investors knew that low-cost tools were available, they’d be more likely to question the incredible fees their local bank charged.

One thing I worry about in Europe is that the broader educational effort needs to be strengthened. There is some coverage of ETFs in the Financial Times, and a fairly good understanding of the products among institutional investors. ETF issuers are starting to go out on road shows and discuss these products with clients.

But what’s needed is a massive, overwhelming educational effort. ETF usage among financial advisors and individual investors in the U.S. didn’t happen overnight, and it didn’t happen of its own accord. It happened because firms, led by iShares, invested massively in educational seminars, tools development and retail advertising.

I remember walking through Grand Central in New York and every wall was blanketed with iShares ads trumpeting the low cost of ETFs.

When I walk through Heathrow or Gare du Nord and see Lyxor and x-trackers ads, then I’ll be happy.

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