Last Updated: 3 June 2023
iShares believes it can double its European ETF assets under management in the next three years, the firm’s European head, Joe Linhares, told IndexUniverse.eu.
The bullish comments from Linhares follow iShares’ announcement, earlier today, that it has agreed to purchase the $18 billion ETF business from Swiss bank Credit Suisse. The deal is expected to be completed by the end of the second quarter, subject to legal and regulatory approvals.
iShares declined to comment on the financial terms of the transaction.
“This was a unique opportunity to acquire the fifth-largest ETF franchise in Europe, but more importantly one with a Swiss product set, which was the one gap we identified in our fund line-up,” said Linhares.
Around half the assets in Credit Suisse’s ETF range are funds issued under domestic, Swiss law, Linhares explained.
“Retail investment in ETFs in Europe, including investment by wealth management firms, is just coming alive. Many clients around the region haven’t had the opportunity to experience the benefits of ETFs because their fund platforms didn’t offer them or because ETFs didn’t pay retrocessions to advisers. But now we’re seeing increased interest in ETFs from Italy to Norway.”
Up to now, the Swiss market for financial products has been largely commission-driven, however. Data from the Swiss National Bank and the University of Zurich showed that commission payments and other inducements made up 36 percent of the revenues raked in by Swiss asset managers in 2008, according to a recent report from Reuters.
Swiss asset managers may have to repay a chunk of at least 7 billion Swiss francs ($7.4 billion) earned in commissions and other kickbacks after the country’s Supreme Court ordered UBS in October to return management fees which had not been agreed with a client, Reuters reports.
One London-based ETF market professional told IndexUniverse.eu in December, speaking on condition of anonymity, that exchange-traded fund issuers have also manufactured commission-type payments for Swiss intermediaries in the past in order to help sell their funds in the country.
However, says Linhares, throughout Europe the overwhelming trend is now away from commission-based advice and toward a US model of paying fees.
“We believe that the approach to retrocessions and inducements is going to change over time in Europe and will follow the US trend of paying fees for investment advice. Retrocessions may not be regulated in some European countries, but that business model will change. We’re hiring people in Switzerland to focus on the financial adviser market and there’s a trend towards using ETFs and other products without inducements.”
iShares’ purchase of Credit Suisse’s ETF business will give the fund manager an overwhelming position in the business of managing physically replicated ETFs in Europe.
According to Deborah Fuhr of consultancy ETFGI, the acquisition would give iShares control of nearly 75 percent of the European market for physical ETFs. Including synthetic (derivatives-based) exchange-traded funds in the calculation, iShares’ proposed purchase would give the firm a 47.5 percent European market share.
Synthetic funds are offered largely by European banks with sizeable operations in the derivatives market. This type of tracker has lost significant market share in the last two years to physically replicated funds, which are typically offered by independent asset management firms.
Physically replicated funds represented $209 billion, or 63 percent, of the $331 billion European ETF market at the end of 2012, ETFGI reports. Adding in non-fund exchange-traded products such as commodity trackers takes the overall European ETP total to $375 billion.
Asked by IndexUniverse.eu whether the deal would require the blessing of competition authorities within either the EU or Switzerland, Linhares declined to comment, saying merely that “we’re going through all the appropriate approval levels.”
Despite the heady growth of ETFs in the last decade, iShares believes that the best is still ahead for Europe’s exchange-traded fund market, says Linhares.
“The next decade will be the gilded age of growth for ETFs. There might be $375 billion in European ETPs already, but that’s still only a fraction of the overall UCITS fund market. We think we can double our business in the next three years. This is an explosive period and the CS acquisition made absolute sense.”
