Hector McNeil, co-chief executive of Boost ETP, the European short and leveraged exchange-traded product provider, expects a consolidation of ETF issuers in the region as increased competition has led to price cuts.

McNeil spoke on a panel about ETFs at the ninth Annual Lipper Expert Forum in London on November 12. “Price cuts will lead to survival of the fittest. I think banks will have to exit the market and there will a lot of M&A and consolidation,” he said.

In the US there are lots of independent ETF providers while Europe is dominated by large “supermarket” firms who aim to provide every type of product and McNeil expects Europe to evolve to become more like the States. In the US firms such as Schwab also provide ETF trading for free and McNeil said this will also come to Europe.

“There will be lots of M&A activity and the growth of independents over the next five to 10 years,” McNeil added.

MJ Lytle, chief development officer at Source, the European ETF issuer, was also on the panel and said that price competition exists for commoditised products such as ETFs tracking benchmark indices such as the S+P 500. “For other products the picture changes. If they create value, investors can afford a slightly more expensive strategy and still beat the benchmark they are trying to outperform” Lytle added.

Simon Klein, head of ETPs and mandates at Deutsche Asset and Wealth Management, spoke on the panel and said price was only part of the cost of an ETFs. Investors should consider factors such as trading commissions and other services provided by an issuer such as tools and education.

“We decided to lower the price on our benchmark products because we wanted to talk to institutional investors who have historically only given mandates,” Klein added. “Now there is a level playing field between ETFs and other types of index products and we can talk to a completely new investor base and grow the ETF market as a whole.”

One of the ways of growing the ETF market is through the launch of smart beta products, which do not track standard indices.

Klein said: “You need to have the right product at the right time and being the first mover is important. European institutions have more than €400bn invested in smart beta strategies which are not in ETFs so it is an additional area of growth and a must-have for institutional investors.”

Lytle added that smart beta can be defined in many different ways – from slight modifications of benchmark indexes to factor modelling or completely algorithmic strategies. “Investors have to decide which slice they believe in,” he said. “In fixed income, investors have realised that market weighting is not the best way to but fixed income securities and there is a move away from that.”

At the conference Detlef Glow, head of EMEA research at Lipper, argued that European ETF flows as a percentage of total mutual fund flows have not grown as much as the market perceives. Lipper fund flow analysis showed that the market share of ETFs from net new sales has fluctuated between 5% and 15% of total mutual fund flows.

“Assets have grown from zero in 2001 to €350bn in 2014 but to be really successful ETFs have to increase market share in net new sales,” Glow added.”The overall growth of the ETF industry has been driven mainly by the general inflows into mutual funds, of which ETFs are a part.”

Klein said the European market is lagging the US by about 10 years and the outlook is very positive. “The growth rate has been fantastic and we have seen many research papers forecast a 20% to 25% growth rate in the ETFs. So in the next six to seven years we could reach €1 trillion in assets under management.”

ETFs/ETPs listed in Europe gathered a record $56.2bn in the year-to-date to the end of October, which surpasses any full year for net new assets in the region according to preliminary data from consultancy ETFGI’s end October 2014 Global ETF and ETP industry insights report.

So far this year iShares, BlackRock’s ETF business, gathered the largest net inflows in Europe with $18.4bn, followed by Vanguard, the US manager, with $8.4bn. Societe Generale’s Lyxor AM was third with $6.2bn in net inflows.

The largest net inflows into European ETFs last month were into equities with $5.2bn and then fixed income with $3.6bn. In contrast, commodities had net outflows of $183m said ETFGI.

Featured image via Comugnero Silvana/Dollar Photo Club