Article by Tom Bailey, Head of ETF Research at HANetf
Historically, retail investing in ETFs was the preserve of the US market. For most Europeans, their connection to financial markets or investments was usually in the form of a workplace pension or simple savings accounts, or for the wealthier sections of the population, the use of a wealth manager or financial adviser as intermediary. However, according to Tom Bailey, Head of ETF Research at HANetf, that is rapidly changing.
In our view, the increased interest in ETFs among European investors comes thanks to three important developments: cost efficient products from retail brokers, suitable products from ETF providers and efficient execution through exchanges and trading platforms.
The US market is still ahead. For example, in 2020, retail trading represented almost 20% of all order flow in equities markets, according to Bloomberg Intelligence figures.1 This growth is also being mirrored in Europe, particularly Germany. There were 12.1 million retail investors in Germany in 2021, accounting for almost 15% of the population aged 14 or above. This represented a 70% increase from the 8.5 million figure in 2011, according to Deutsche Aktieninstitut.2
Savings plans as a gateway to ETFs
Over the past decade German investors have been spearheading the adoption of ETFs in Europe. According to research by Blackwater Search and Advisory, German investors have a collective $432bn invested in ETFs, representing a 27% share of the European ETF market. For reference, the UK represented 25%, followed by Italy with 14%. A major driver of German retail investors adopting ETFs has been the rise of ETF saving plans offered by retail brokers. This is the first of the three points mentioned earlier: cost efficient products. These allow retail investors to set up automated monthly investments which can be as low as €1 depending on the provider, although actually invested average figures are closer to the €100 mark per monthly savings plan execution. Brokers often wave their commission for those savings plans, which makes them economically attractive for long-term savers. In 2022, there were almost 5 million investors using savings plans, up from 1.9 million in 2021, of which 90% are in Germany.3 The industry expects that the total invested assets in savings plans across Europe could reach €350bn by 2026.
The rise of thematic ETFs attracted more investors
At HANetf, we have experienced this trend since we came to market in 2018. Over the past years we have struck several agreements with retail brokers who expanded their offering in this space, recognising the growing importance of retail investors for ETFs and ETCs in Europe. Particularly we have found that thematic ETFs have found strong resonance among retail investors thanks to their relatable topics.
Thematic investing is about identifying a broad structural change in the global economy that should drive security prices, whereas previously this would result in investors choosing one or several stocks related to this trend. But for many investors, this sort of stock picking is unappealing owing to the level of research required and the idiosyncratic risk. With thematic ETFs, retail investors can buy a basket of stocks that are potentially set to benefit from a theme. Some of our most popular ETFs among German retail investors have been the Sprott Uranium Miners UCITS ETF, the Travel UCITS ETF or the EMQQ Emerging Markets Internet & Ecommerce UCITS ETF. This illustrates the second point mentioned earlier, the growing product set offered by providers.
HANetf has also seen very strong adoption among the German retail market for the ETC Group Physical Bitcoin ETC. Around a third of the ETC’s assets have come from retail, according to a HANetf investor survey conducted in 2022. For many retail investors, the ETC allows them to gain physical exposure to bitcoin in the same platform they use for their other investment funds. With dedicated crypto exchanges in the spotlight last year, investors in the ETC also appreciate the strict regulation around the ETC. With digital assets prices recovering in 2023, we expect that this trend may continue.
Liquidity is crucial for future growth
Finally, it is important to recognise the role of exchanges and specialised liquidity providers who make it possible to execute all those small retail trades in a cost-efficient manner. In Germany, Deutsche Boerse provides the largest ETF trading venue by volume called Xetra. But in addition to Xetra, there are a wide range of specialised trading platforms such as Lang & Schwarz, Gettex, ICF Bank or Tradegate, who offer trading until 10pm - far beyond regular exchange hours - and who offer attractive conditions particularly for smaller retail orders. Accordingly, these platforms have a strong standing in the ETF retail trading space.
Our personal opinion is that the growth of ETF retail investing will spread further across Europe and that the liquidity provider landscape will evolve further with pan-European trading venues potentially taking on an important role to facilitate additional liquidity. Trading venues such as Spectrum Markets could help provide liquidity, particularly in markets that may not have such a liquid home market as Germany. In that case, local brokers may want to cooperate with cross border liquidity providers who can function as a bridge and give them access to efficiently execute ETFs via other established ETF markets like, for example, Germany. If the US is an indicator of what’s to come, then the ETF retail story in Europe has just begun.
The above article and the opinions and ideas presented therein are solely those of the author and do not necessarily reflect those of Spectrum Markets. Spectrum Markets shall not be held liable for any inaccuracies, misinformation or other information provided by the author. Nothing herein constitutes an offer to sell or a solicitation of an offer to purchase any financial instruments listed on Spectrum Markets or any product described herein. Spectrum Markets does not provide financial services, such as investment advice or investment brokering. Prospective retail investors can trade such products only with their brokers. The information herein does not constitute investment advice or an investment recommendation. Any information provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it.