Investors in certain European markets such as Switzerland are now allocating more to passive ETFs than traditional index-tracking mutual funds, data shows.
Switzerland leads with 56% passive allocations in ETFs and ETFs also rank more prominently in France and Germany, too.
Research in Finance surveyed almost 900 retail and institutional third-party fund buyers and distributors for its ‘European Fund Selector Study Q2 2024’.
Germany and Italy are “at the crossroads” in Europe’s passive investment landscape, with an almost 50/50 allocation split between passive ETFs and index-tracking mutual funds, the data shows.
Asked about active ETFs, some 21% of the survey respondents across Europe said they already recommended them and 13% said they would start recommending them.
The research found that 45% of European selectors were familiar with active ETFs but were not planning to recommend or allocate to them any time soon, and 22% remain completely unfamiliar with them.
Holding active ETFs back in Europe is the perception that they lack tax advantages, unlike in the US where investors can defer tax. However, Research in Finance noted that Ireland-domiciled ETFs pay a reduced rate of corporation tax – 15% rather than 30% – for investment in US equities thanks to the country’s double-taxation agreement with the US.
Commission payments to distributors – one of the most enduring issues in European funds – was seen to persist to the detriment of ETF distribution. A private banker from France who was interviewed for the survey, said: “We are looking to offer ETFs in future, but the problem is that we run on retrocessions, and we’d have to charge very low fees to sell ETFs, which doesn’t currently fit with our business model.”
Mark McFee, editorial and insights director at Research in Finance, said that despite the introduction of ETFs in Europe over two decades ago, there’s still a relatively low level of familiarity and understanding versus mutual funds among both investors and financial advisers, or a lack of impetus to use these vehicles.
“Some of the structural barriers like lack of tax incentives or the continuance of commission payments are unlikely to change any time soon. Therefore, providers looking to distribute ETFs via intermediated retail channels should focus their efforts on education, helping advisers to understand how ETFs could complement their usage of other investment products like mutual funds – for example, through low-cost access to specific strategies, the facilitation of tactical allocation opportunities thanks to intraday trading, or additional portfolio transparency.”
