5 Surprising Things About the European ETF Market

I think Tom is his own man. He's much more of an expert in smart beta and multi factor research than I am. For sure, he's our smart beta expert. But the reason he went to London. He was here for a full year, and we kept getting the same reply from clients, I love this data set on the library, or I love this note, but can you do it for Europe? But can you do it for Europe? But can you do it for Europe? And we got this so many times that we thought, Okay, we should just

do it for Europe. And Tom is being sent there to do it for Europe. So I went to the pub with him bottom a pint. We have an incredible office, this little pub around the corner. We took him there and started kicking some stuff around with him, and we just started talking about e t F s in Europe, and I thought this would actually be a really good episode. And he happens to be back in New York now on like a spring break, I guess, And we said, why don't why don't we talk to him about what

he's learned in the little baptism he's had in Europe. Yeah, I think it's good to think global sometimes. The t F they trade and I think last time I checked seventy exchanges around the world. Europe is the second biggest area after the United States. But it is different, and the culture is different, the regulations are different, and kind of it was a it's a good excuse to get some perspective on how investors in another country do it

and some similarities and differences. The US is somewhat spoiled because it's just the US over there. There's all these different countries, They've got different currencies. We sometimes referred to it as the Wild West in terms of trying to tame that beast, which is all these different uh like legacy. Uh, situations that make it hard to just do certain things that are easy in the US, and so Tom has

his work cut out for him. Okay, So joining us on this episode of Trillions, Tom Saraphagus, an analyst with Bloomberg Intelligence. This WEEKND Trillions, five surprising things about the European et F markets. Tom, Welcome back to Trilliance. Can you say your first name again? Last name Sara Hagus? Okay, it's I have a much easier time in Europe getting by with that name. He's our version of the Greek freak. It's just a basketball player for those who don't know

from the other Bucks with a crazy Greek leame. So, Tom, how do you like London so far? It's great. Yeah, it's it's going great. I've always uh, you know, I've been to London before, so you know, before I decided to go, I had to make sure I like the city. So it's sort of just like a cleaner version of New York, a little bit of a slower pace. But so far, so good. And talk to me about what

you've learned since you've been there. So I think Eric's sort of like alluded to it in the intro with the t F market, I meant life like it's much slower paced. Uh, And they take their holidays very seriously and they're called holidays. Yeah, they are called holidays, And apartments are called flats. The elevators to lift, so you sort of have to get used to it. You know. It's like English technology. So that is actually a perfect transition into E T S. Right, So what's it like

over there? So I would say overall, it's the same but different, right, and so can we end the podcast there is that it? So overall, Um, you know, they do want to be like the US, but um, some things that are kind of alluded to, they're just they're not there yet there, you know. I think the biggest thing is we call it Europe, right, but when you think about it, it's all these regional markets all put together. They're all very different, to have different mentalities, they have

different investor bases. There's a lot of fragmentation in Europe. So I think as they move sort of trying to be more centralized, the market is going to grow faster. But um, they really want to grow. I think they It's sort of why we even decided to put an analyst age because they asked for for content. They're like, we really want more help into helping figure out this market. Um, which is why we're in the position that we're in.

So UM, I think it's gonna keep continuing to grow, not to say it doesn't have its own hurdles, but okay, so you brought with you something like five mind blowing facts. Are they gonna blow my mind and Eric's mind or just mine? I'm gonna pretend my mind is blow. I probably know these, but I when I first saw them, my mind was blown. So I'll go back to that feeling of not knowing. I think some Eric might know,

but definitely some Eric might know. Um, I think any of the et F nerds listening are going to be blown away. But there's some other ones that I think Eric didn't know about. Drop your hammer. So let's start with the first one. Um, there are actually way more e t F s in Europe than there are in the U. S is about almost three thousand in Europe.

There's only about in the US. But asset wise, we're at three point six trillion here less than a trillion in Europe, right, so way more products, much fewer assets. And that goes back to the the thing I was talking about fragmentation, right, So if you are so, what you end up finding here is we have three smpts, but in Europe you have like fifty stock six et s, right,

because of all that fragmentation. So if you are an issue er launching a product in the UK, you're going to launch a similar product in France and Germany xcess. You end up having a lot of these copycat products, and because of that, you end up having a lot more products out there, but the assets so when you sort of look at assets per product, it's much less in Europe. So literally it will be the same et F but listed on different exchanges yep, and like different exchanges.

And also the thing that we are not used to here in the US their share classes there, right, So if you buy an e t F to paysitive, then you're getting that dividend and Europe you get to pick that I want the dividend do I want the dividend being reinvested. So there's all these nuances that you don't um sort of appreciate being a US invest So that's interesting because I think there's a little behavioral economics in there, which is when you have too much choice. Maybe it's

a bad thing. And when you talk about all those different products, are we talking about if you are are you are they cross list thing on all these different exchanges or do they actually go to that country domicile and come out with a fresh new product in that country. No, So what it will be is um. There's also issuers in all different countries. Right, So there's DWS right, which is German, There's I Shares, there's the French issues, so

a lot of them. What they do is okay, So like French clients are gonna buy from the French issues, So the French companies are going to launch the you know, the the broad bench mark e TS DWUS is gonna launch this broad market et F, I Shares, Vanguard, etcetera. So you end up having a lot of the same products just launched them the different respective markets. Um. And

then on the cross listings. That's one thing too. But there's also different share classes which we don't have here in the U. S. That's a that's a very new thing for anyone who's sort of been trained in the US and going over to Europe. Uh. And they also have different currencies. Again, I think we don't really have to deal with here. So there's a lot more decisions that go into buying an et F there do I want this? Do I want the dividends? And what currency

I want? A currency hedge? And then what currency the frank, the Euro, the pound. Right, So there's all these decisions that go into buying an ETF that we don't that we're not necessarily used to here. Okay, so related what are people investing in if they're not investing in ETFs

active mutual funds? So like here again, the whole the big battle there is sort of active active mutual funds versus et s UM And then a new piece of of of regulation went into effect last year which is MYFED two, and that was really trying to shine the light on the cost of active. Right, active funds are much more expensive. Research plays a big part in that it does, and the unbeldoding of research and ETFs just

naturally are going to be the beneficiary of that. Right as there's more scrutiny on costs and that comes the light, uh, and there's sort of trying to get away from the commission based models which have been really big in Europe. Et f are just naturally gonna do we just pause there? This is major to me. This is the biggest catalyst for et F growth in the U S, which is the shift away from the commission model. So all these wealth managers and advisors were getting paid by the mutual fund.

It's kind of like a kickback, and that's what determined whether you were in this fund or that fund. That it's dying and the new form is fee based, which essentially just means the advisor gets a percent of the client's assets. And once they're getting a percentage of that pie, of course they're motivated to pick cheap stuff because now it's coming out of their money too. If if in the US we are saying, I don't know in the sixth inning of that move, some people may debate that,

but let's just say we're in the sixth inning. Where are we in Europe from the broker the commission broker model to the fee based model. Sure, I would say we're probably late first inning because if it just went into effect last year, right, so it's just all of now bringing on that, shedding that light on it. And when these things passed, it's never perfect right from the get go. It's like Okay, we're gonna pass this regulation

and it's going to be perfect. They're still sort of the industry still started, still trying to figure it out. So it's still very early innings in Europe on sort of that transition over there. And culturally are people a little less okay, paying more in Europe? Because in the in the US, whether it's Amazon or E t F or Vanguard, whatever, people are pretty We're like professional consumers. We are a consumer culture and we're very sensitive to cost.

We will go to the to me. Yeah, So are they that intense over there when it comes to that culturally, I would say no. And it's even this goes back to the distribution. The way it's handled in Europe is you go to your bank, right in your bank handles everything. So I have my mortgage in my savings account on my investment account at my bank, and I had that because my dad had that. So when my dad passed to the account to me, I'm not moving it because

it's convenient. It's there already, know the advisor. They're charging me whatever they're charging me, and they're putting me in their active funds. So yeah, there is this huge uh, the cost obsession isn't as big in Europe, and we actually see it in the flows. And I've studied this um here. Right. If et F cuts its feed by basis point, everyone sort of shifts over in Europe. It's

just not that obsessive on costs. Yeah. I think as more education comes and there's more more the regulation gets put to the to the forefront, it'll the obsession I think will start to because like the land before time, you know, it's like twenty years ago, we'll get there. All right, My mind is not blown, but you know

I've got you've impressed me. There you go, uh fact to a number two Okay, I think this one is an interesting one, and it's on Vanguard, right, So they you cannot talk about the the industry here and not bring a vanguard. They are such a big powerhouse here, they're sucking up all the floats, they're changing the advisor model everything. Here in Europe they don't have that same sort of No one really knows who Vanguard is, right, So the number two issue where here they're like number

six in Europe. They have markets here only four percent in Europe. So what I think is really interesting is that here Vangard doesn't really have to do anything, like everyone knows their Vanger. They're cheap and all the money's flowing to them. In Europe, they sort of have to go out and promote themselves like, hey, we're Vanguard, this is what we're doing. Uh, you know, we do each We're kind of a big deal. We're from Pennsylvania. So I think it's really interesting that you sort of see

them not in the top tier firm. They're sort of like in the second tier and they actually have to like hustle and work and like sort of do all the work that the other firms have to compete with them here in the US. So they've that role sort of reversed in Europe for them if they're six, right, Uh black Rock is where what are they? Black Rock is one? So so it's not like a U S thing. It's just they were late going there. Maybe they were late, and but they are sort of what we've seen here

with like JP Morgan being really aggressive. I see that with Vanguard over there, like they're opening the opening up new offices, they're really building out their sales teams, so they're really sort of in ramp up mode. When I feel like here the sort of just sitting back and sort of just collecting all the money. The fisher jumping in the boat here. Yeah, exactly. Yeah, they've taken like a little over a billion a day here. How quickly

have they risen in the ranks? Though, they're rising very quickly. I think every issuer has their eye on them because they've seen the success they've had here. Um, And it's interesting. They're not the cheapest ones out there in Europe. There are other firms that are cheaper than they are, but all the E t f s are there. You can quind of see them like starting to warm up, like they sort of like the picture of the bullpen, like they're starting to warm up and everyone's starting to watch

them because they have seen what they've done here. Um, and they're you know, they're they've been really aggressive with hirings. So what's the football? Mon the four? It's like he's got the the like the kicker starts like exactly into the net thing. By the way, have you picked a team yet? A club? Sorry? So I've always liked the

Hot Spurs from a long time ago. Now they're good and everyone accusing me that I like them now, But we're talking is the soccer because not the San Antonio Alright, So I'm actually startled that Vanguard is that sort of you know, up and coming over in Europe? Blow my mind with another fact, okay, um, retail investors, right, they have been really the ones that have been behind a

lot of the growth here in the US. So if you sort of look between retail and institutional, it's about a fifty fifty split here, it's very small in Europe. It's only about in Europe it's really small. Um. And again that comes back to the the commission model, right, because everything is at your bank. Your bank's handling everything. They're on the commission model, so they're putting you in

mutual funds. I'm gonna put out a theory. Is this because everyone's taxed at a higher rate in Europe and therefore they don't have as much disposable income to just do their own investing. On the side, I think it goes back to the that could be it, but also the convenience factor, Like it's just the mentality is very different there. So here, you start a job, what's the first thing you do? You felt your four O one K form, right, and you're sort of like have you

on I RA. In Europe it's different. They don't sort of have this do it yourself like investing culture as much as we do here. So retail just hasn't really adopted. It is fast, but you know they don't. And by the way, by retail, we mean advisors and do it yourself retail correct That is stunning. In the US, I think that number is probably more like and it's eleven percent there. I mean retails were the majority of the flows come and advisors institutions use them, but more to

trade and adjust their portfolio. It's more like for liquidity. That is stunning, And I think it does speak to that incentive. If the middleman is incentivized to get the kick back from the mutual fund and they get paid more that way, why on earth would they move to an e t F for something that doesn't pay them. And this is part of what happened here. But now I think people actually look for the fee base model,

which some people are will use fiduciary. That's the big word that's used here for that mode, which is acting in your client's best interests. So it sounds like fiduciary is not a big deal over there, so I don't want to be clear. And this goes back when we say Europe, right, so some countries have moved away from that commission model, so like the UK, like the Netherlands have sort of banned that, but other countries haven't. Right this this goes back to the nuance and the fragmentation

in Europe. So yeah, you might see UK might have a bigger chunk of retail and advisors than they do in other in other countries too. So I think as it gets more centralized and more that models adapted across Europe will eventually see it. But for now it's really mostly institutional, like it's for for tactical moves or or like positions a big portfolio. I was over there and I met with initial I won't say who, but I was.

I was, you know, naive, I guess, and they pointed out they said, they said, here's what people are paying for for everything, their advisor fee. I'll add it up. It came to like six to eight percent. You know, that's the fund fee, which is like two percent, then the advisor fee and then the the loads. You start adding it up, it was like six um here, you know, you might pay one percent for your advisor and then

twenty basis points for your funds. So this is dead's a large difference, and I think this is probably what a lot of the U S issuers. As this market here gets so competitive on price, they're seeing opportunity there and that's why you see not just Vanguard, but other US companies go over there to try to sort of be first. As that model moves, they'll be there with the products totally. Can probably squeeze a little bit more in Europe yet before all that, because we're starting to

see really cheap products start to launch now. But they're just launching now right, so I think there's still a little bit of room for them to be able to make make a little bit of money there. And all that you actual said, all the U S shuares are over there now either they started up their own teams there or they bought someone to already have some of the infrastructure in place. Okay, I want you to turn

out the volume. Give me something big. I think this one's big, and it's not specifically for et s, but I think it's going to bring it full circle. And it's sort of like this this policing on closet indexing. Right. So what that means is there are funds out there that that charge a lot more than say a cheap etf but they don't look any different than the benchmark. Right.

So in the UK they got really strict on this and they basically went in and said, Okay, we're gonna look at all the funds and if you are just a closet indexer, we are going to flag you and we're going to make you pay back some of the fees to investors. Right. So last year thirty four million dollars and fees actually went back to investors. This is actually a big deal. This is people are looking at portfolios and being like, you're actually not doing what you're

saying you're doing exactly. So they basically looked at um a bunch of things, basically are you giving the value that you're saying that you're doing. So it's basically a mix of qualitative data that they did balso like quantitative. So they went in and said, okay, let's see your marketing materials. How are you marketing this fund? Right? Are you marketing is sort of like this active fund and

making all this Yes, exactly. In Europe, they're much more aggressive about sort of honing in on these closet indexers here, I feel like incess sort of no. They'll look and they say, hey, this is the closet nex I'm gonna move my my funds there. There's a lot of scrutiny. And what's eventually going to happen is you have ETFs on one side, you have the closet indexers in the middle. Then you're sort of like the high active sture active.

They're basically coming in the middle and splitting it right there, gonna so naturally that split is gonna put a lot of money back into ETFs in Europe. So this is fascinating. I called the closet indexing police. Whenever I post this on Twitter, everybody usually has a negative reaction. They're like, don't you know you can't police this stuff? Um, but I see what Europe is doing. In the US, I

think a lot of this happens naturally. People have gone, like we call the trend going from closet indexing to actual indexing. That's why if you look at the Fidelity Magellan where a lot of these big old traditional active equity funds, the holdings look a lot like the SMP fire, and a lot of people are those are the funds they're leaving. Why pay one percent for that when you get just about the same thing for five basis points um.

Again in Europe, maybe people aren't doing it is naturally in the in the regular to trying to just push this little Here's the issue though, and I've come to feel a little sorry for the closet indexers because if you if you take a lot of active bets and a lot of active share, you will not sell as much as the fund because it's the middlemen who don't

want anything to look that crazy on the statement. So they actually it's because of advisors having career risk that they don't want actual true active They may say they do, but they actually want it close to the SNP. That way, it doesn't in a bad year, it doesn't return much worse than the SMP, and the client goes, oh my god, why am I down? That's what I'm saying. So it's the demand from the advisors that has the active mutual funds here hugging the benchmark a little because they don't

want to get lose assets. This is what Peter Krauss was saying. In our in our podcast with him a couple months ago, he he hates this too. He thinks this is just protecting your assets. Again, the advisors demand is behind a lot of this, and they don't The focus is always on the active mutual fund. But the advisors are really the one asking for it because they they may not want to buy to Vanguard funds in call today because the client may go, why am I

paying you? So they want something that has like different to it, but might have returns that are close to the S and P so they don't look bad or get fired. So in a way, closet indexing is by you know, by design and by demand. It's if you went to high active share, you would be more active and you be truly active, but the client would have to weather a bunch of down years and some real steep drawouns because over you know, that's how true active goes.

You don't win every year doing a real true active strategy. So I find this issue to be very complicated and not as simple as like, oh, these active mutual funds are really not doing their job. Um, it's all about incentives and and keeping your job and keeping the assets. And I think it's just the system that has created all this. It up. Give me number five. Okay, so this one is a little bit nerdy, but it's sort

of sometimes in Europe. I noticed some things that they're much more advanced and other things in certain things and much behind other things in the US. But here, and I think this has come up a lot, especially for small issuers. It's about payments to market makers, right, and what happens in the U s. If you're a small issue or with a new product that doesn't trade a lot, you're at a disadvantage, right, no one's really buying your product. Someone goes to buy it. They noticed spreads are tight

in Europe. You can actually incentivize the market maker to come in and provide liquidity for that product. It's banned in the US, but in Europe allows it, They do it, They let you do that. Um I think it's interesting that they do that because sort of a lot of issuers here have been petitioning to have it done. Europe has already been okay with that. Um So, I think

that's a huge difference in Europe. And what I think that ultimately might do is a lot of the smaller issuers are going to have sort of a better shot at being able to raise some assets than in the US, because it's really competitive being a small issuer going up against some of the larger firms. Here um and oh, here's the most important question. How do you pronounce s M A R T hyphen b E T A. Well, I'm going to pronounce it smart beta. Over there, you

have to pronounce it smart beta. Okay, that's when he comes back, starts saying smart beta. He's coming right back. Let's let's see how you're if he's still American? Ready, can you say aluminum? Aluminum? Okay, not aluminium? Right, that's next level. I mean that's like it's like then you it's too late to ask him back. Yeah, Tom, thanks for joining us in trillions, Thanks for having me, Thanks

for listening to trillions. Until next time. You can find us in the Bloomberg terminal, Bloomberg dot com, Apple Podcast, Spotify, and whatever else he likes to us. We'd love to hear from you. We're on Twitter, I'm at Joel Webber Show, He's at Eric Baltunes, and you can find Tom Sara fagus at Tee Sarah Fagas. Good Luck's bulling that Trillions is produced by Magnus Hendrickson. Francesca Levy is the head of Bloomberg podcast Bible