Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to the latest in our Market Talks podcast series.
Speaker: We are featuring a variety of different topics across the funds industry.
Speaker: And today, we will discuss some of the key trends shaping the ETF industry.
Speaker: Introducing the topic is Jane O'Reilly, Global Client Executive Platform Solutions Security Services.
Speaker: Jane, over to you.
Speaker: Thanks, Gabriella.
Speaker: Today, we will reflect on some of the key trends shaping the future growth of the ETF industry in Europe.
Speaker: including retail adoption, the rise of active ETFs, and the role of digital platforms.
Speaker: To explore these topics in more detail, I'm delighted to welcome Steve Farmer, Global Head of ETF Product at HSBC, and Rob Rush, Global ETF Product Head, ETF Servicing at HSBC.
Speaker: Thank you both so much for joining me today.
Speaker: Rob, can we start with you, if you can provide us with a brief overview of the global ETF landscape, and then Europe more specifically?
Speaker: No problem.
Speaker: Thanks, Jane, and thanks for having me on.
Speaker: David O' And I think it's fair to say that the ETF industry has been an incredible success story as we're sitting here today ETF assets are.
Speaker: David O' globally are touching nearly $10 trillion and over the last 10 years the ETF industry has continued to meet even the most optimistic projections and still shows no signs of slowing down.
Speaker: David O' Even as per pwc 2023 ETF industry survey.
Speaker: Over 40% of respondents are predicting asset levels of 15 trillion by 2027 and even 30% predicting 18 trillion or above.
Speaker: As we look across the ETF globe, we see various stories playing out.
Speaker: In the US, everyone is keenly focused on the rise of active funds within the semi-transparent structure and the advantages the ETF wrapper can bring to investors.
Speaker: Also, a number of US issuers are looking to expand their ETF offering to Europe with
Speaker: Europe being seen as the domicile choice for the international ETF distribution platform.
Speaker: In Europe, our attention is firmly on retail investors and the catalyst for growth across that segment over the next three to five years.
Speaker: And that's something that we will talk about a little bit later.
Speaker: While in Asia, it's a little bit of a different story.
Speaker: There's still a lot of inconsistency and fragmentation across the region.
Speaker: Access to the Chinese market is still a hot topic for international ETF issuers.
Speaker: And also in Australia, they're predicting very big growth in 2023.
Speaker: So there's a lot going on and a lot of different stories playing out across the globe.
Speaker: Thanks, Rob.
Speaker: And Steve, a pretty optimistic outlook of the European ETF market in the coming years ahead.
Speaker: So in order to fully capitalise on this growth opportunity, could you outline some of the key areas EU needs to focus on?
Speaker: Yeah.
Speaker: Hi, Jane.
Speaker: I think there's a few things that are quite topical at the minute.
Speaker: when we're reading the ETF financial press, one of those is the consolidated tape.
Speaker: So one of the known barriers to growth in a way of the European market is the natural fragmentation of Europe.
Speaker: We have lots of different currencies, countries, tax rules and regulations around ETF investors.
Speaker: So as a result, we have this very fragmented market that perhaps when you compare us to the US doesn't exist.
Speaker: And so that naturally presents problems in terms of perception around liquidity.
Speaker: So there's calls for consolidated tape, which means bringing together all the liquidity venues, displaying what has traded on a post-trade transparency basis, but also what's possible to trade on a pre-trade transparency basis.
Speaker: So bringing those together in a consolidated view, i.e.
Speaker: the consolidated tape is key.
Speaker: Another consideration that we look at ourselves at HSBC is around liquidity and the importance of liquidity.
Speaker: So
Speaker: Again, fragmentation has driven the market to trade in an OTC nature.
Speaker: So we have this request for protocols which dominate the way in which ETFs trade.
Speaker: So we at HSBC, we're looking to improve liquidity by introduction of other alternatives to the RFQ and the OTC nature of the European market by the introduction of algorithms.
Speaker: So we have piloted a fair value based algorithm that takes a look at how we can drive liquidity on exchange and hopefully promote that transparency of liquidity and give clients access and the ability for price discovery on exchanges, which we think is a key change that needs to happen in the European market.
Speaker: And finally, the traditional advisor model and retrocession payments.
Speaker: This is key.
Speaker: So this is where traditional mutual funds
Speaker: They have a retrocession fee based built into the T of the fund.
Speaker: So the management fee of the fund, which pays for distribution.
Speaker: So pays the financial advisor for the selling of that particular fund.
Speaker: In the UK, for example, we had the retail distribution review back in 2013, I believe, which banned these retrocession fees.
Speaker: A similar consideration is happening in Europe.
Speaker: We do think that that's a positive for the ETF market because
Speaker: because ETFs don't have retrocession fees, it kind of levels the playing field.
Speaker: And fundamentally, it gives the end investors, the retail clients, the ability to be sold the most appropriate product for them.
Speaker: So those are the three considerations that I think spring to mind when I'm looking at areas of focus and the things that we at HSBC are looking at.
Speaker: Thanks, Steve.
Speaker: So considering these challenges, it's clear that if addressed, there's quite a significant opportunity for ETF growth in Europe, with the rapid becoming a lot more appealing to retail investors.
Speaker: Rob, could you briefly expand on this?
Speaker: Yeah, there are a number of reports out there at the moment that are predicting a surge in retail investors in the coming years in Europe, in the European market.
Speaker: The number of retail investors already doubled since 2020.
Speaker: And there's a number of different markets that are driving that growth, particularly in Germany, we see a large growth of the retail investor.
Speaker: I think there are a few aspects that will help drive that further.
Speaker: I think one of the key ones is financial literacy and investors being educated on their options in terms of investment.
Speaker: Trading principles, including market conditions, diversification, fee structuring, are all feeding into investors becoming more comfortable with ETFs.
Speaker: And also, I think as well, if you look at it from a generational perspective, we do see ETFs being positioned for the next wave of investors who are more financial
Speaker: and more tech savvy and their ability to trade on apps, etc.
Speaker: ETFs are perfectly placed to take advantage of that.
Speaker: I think brand awareness and fee sensitivity is an important factor in their investment decisions, although they are obviously willing to pay a little bit more for ESG based investment and also some semi-active products that might be in the market moment as well.
Speaker: David Price- And I think one of the biggest developments and the biggest growth is going to be the online platforms and we've seen a big move.
Speaker: David Price- Over the last number of years for mutual fund platforms to add ETFs to their ecosystem and as investors have been moving with their feet so it's important that they don't lose out on the future of ETF growth in that space.
Speaker: That does bring some challenges for them in terms of the infrastructure that they need to put in place.
Speaker: But it's definitely seen as an area that's going to be big, huge growth in the future.
Speaker: I think at the end of the day, the main advantage of the ETF is just that it's an easier vehicle for investors.
Speaker: Simple account opening, instant execution, and all at a relatively low cost.
Speaker: As I said, it's probably the vehicle of choice for the next wave of retail investors in the market.
Speaker: Absolutely, digitization is a key theme across the industry more broadly.
Speaker: And in the context of ETFs, the wrapper is quite well suited to platforms, as you've mentioned.
Speaker: What are the key areas of consideration in this regard?
Speaker: Yeah, I think from platforms perspective, the main challenge has been around how shares are issued for an ETF versus a mutual fund.
Speaker: Obviously, for a mutual fund, an industry that had grown up over many, many years, transactions were traditionally based on cash amounts.
Speaker: And as such, an investor could be issued fractional shares.
Speaker: And that's something that an ETF can't do because you have to actually custody the asset in your account.
Speaker: So that's quite tricky for platforms to adjust their technology to manage that new process.
Speaker: And that's an area where there are a number of participants, including HSBC, that have stepped into that place to try to provide execution and custody services to those platforms to allow them to have that same experience for their investors, but to also deliver on the custody and execution challenges that they would have.
Speaker: And that's going to be really important going forward.
Speaker: We can't talk about platforms without also mentioning the issue of retrocession fees.
Speaker: I know Steve touched on it earlier.
Speaker: While some platforms have been fast to bring ETFs to their customers, others still lag behind as they want to protect their retrocession fees received from mutual funds.
Speaker: However, this, I would say, is a bit of a false economy as investors are voting with their fees.
Speaker: And so not participating in the ETF story will ultimately prove detrimental to their business models.
Speaker: Outside of digitization, product differentiation is also super important.
Speaker: Recently, we've seen the rise in the number of active products, particularly with newer entrants to the market.
Speaker: Steve, what should be considered here?
Speaker: I think the first point to make here is that ETFs, when they were first launched, certainly when I started trading ETFs, they were very much seen as passive products.
Speaker: But that's changed.
Speaker: The story's changed.
Speaker: David O' Really, when we think about ats what are they will their pieces of financial technology that's fundamentally what an ETF is.
Speaker: David O' And it replaces the technology that came for the mutual fund and rather similar you know futures that we're talking about rapid technology here.
Speaker: David O' And actually what we've seen and Bob touched on this as well is, particularly in the US where.
Speaker: clients are choosing the ETF as the wrapper of choice.
Speaker: It's their preferred access to a specific strategy.
Speaker: And that's fundamentally all an ETF is.
Speaker: It's just access to strategies, but it's more convenient.
Speaker: I think Rob used that word as well.
Speaker: ETFs are just convenient products for gaining access.
Speaker: So what we're seeing, and particularly in the US, we saw a trend last year, I think close to actually probably mainly from the US, but globally, a switch of around 2 trillion.
Speaker: So a significant number
Speaker: from the mutual fund, old technology, to the ETF, the new technology.
Speaker: And so that really opens the door to traditional active managers being able to participate and join the story when it comes to the ETF growth.
Speaker: And that's really the differentiator.
Speaker: So creating another S&P 500 ETF is not going to change anything.
Speaker: Having an active story, having a product that is differentiated by its very nature, the actual strategy that's embedded within that, that's the difference.
Speaker: And so we're seeing active managers launching ETFs in the US in particular, but we're starting to see that trend here in Europe.
Speaker: And we very much consider that that's going to continue.
Speaker: And that's where the next phase of growth is going to come from.
Speaker: Stephen, Rob, thank you both so much for joining me today.
Speaker: It's been a really interesting discussion with plenty of useful insights.
Speaker: So as always, if listeners have any questions in relation to any of the topics and indeed our markets and security services, ETF service proposition more broadly, please reach out to us and we'd be more than happy to have a conversation.
Speaker: Gabriella, back to you.
Speaker: Thanks.
Speaker: Thanks so much, Jane, Steve, and Robert.
Speaker: Super, super interesting.
Speaker: I did not know that the ETF space was so high volume.
Speaker: So it's great to hear this.
Speaker: So I would like to thank our audience for listening to this edition in our series of Market Talks podcasts.
Speaker: We hope that you enjoyed learning more about the European ETFs landscape.
Speaker: Stay tuned for more from our podcasts as we explore more trends in the coming weeks.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
