he booming business with exchange-traded index funds (ETFs) is also facing significant changes in this country. This is what Caroline Baron, Head of European ETF Sales at the fund house Franklin Templeton, says in an interview with finews.com.
Caroline Baron, how is the ETF market developing in Switzerland?
I believe we are just at the beginning. The ETF market started more than 20 years ago and had mainly private banks and asset managers as core users across Europe. These clients still reflect the core business, however in recent years there has been an uptake of retail clients. Today, the European market is reaching around 1.7 trillion Euros in assets. In fact, 2023 has been the second most successful year for ETF uptake in Europe. Nevertheless, Switzerland has been a part of the ETF movement and retail clients have been investing over platforms such as Swissquote.
Will actively managed ETFs also turn into a trend in Europe as it has in the US?
The US and European markets are not comparable. In the US active management is developing quickly. 25 per cent of capital inflows went into actively managed ETFs in 2023 and in January of this year we saw around 50 percent of the flows going into active ETFs In Europe, we are only scratching the surface, there has been a trend towards active ETFs, however still 95 percent of ETFs are passive. In certain cases, you miss opportunities whilst tracking an index, as you are stuck to the index rules. By actively managing an ETF value can be added in various areas that are not very mature yet. For example, on the fixed income side, green bonds reflect an area that is not very mature yet and therefore presents many opportunities for active management.
Next to active ETFs, what are some other dominant trends in the ETF market?
Given the ongoing appetite for sustainability here in Switzerland, it is our duty as a product provider to offer additional strategies in the space and for example we offer, among other things, several Paris Aligned Ucits ETFs targeting specific regions, an approach that allows investors to support the decarbonisation of the economy in line with the Paris Agreement. Another trend is certainly the retail uptake of ETFs in Europe.
«By actively managing an ETF value can be added in various areas that are not very mature yet»
50 percent of the buyers in the US already are retail buyers. In comparison, in Europe, 10 years ago it had mainly been institutional buyers, as ETFs were not easily accessible so far. Through for instance neo banks, online banking and even traditional banks that are evolving their business, ETFs have been available now for a while to the broad public. Trading ETFs on retail platforms is cost-efficient, digital friendly and transparent.
Does this mean the customer base of ETFs is changing?
Today there is literally no client type I can think of who is not investing in ETFs. In addition, as all investor types, from end-clients to institutional clients, become more sophisticated, their expectations about product innovations have risen as well.
«The intergenerational wealth transfer will impact the ETF business significantly»
When it comes to our business, thanks to Franklin Templeton’s size, we can also offer a variety of strategies in the ETF area, ranging from active to factor-based to passive approaches and covering the entire spectrum of investment opportunities. We have developed solutions that cater to the individual needs of private and institutional clients. And we offer our clients customised support services built on a global distribution platform, technology-based tools and comprehensive value-added services.
What will impact the ETF market in the long-term?
The intergenerational wealth transfer will impact the ETF business significantly, as is already reflected in the retail uptake of ETFs. Younger generations are inheriting money and are thus turning into the new wealthy clients. Since the younger generations are more inclined to use digital channels and are more sensitive and knowledgeable about the ETF vehicle, they are also more likely to invest. This will certainly accelerate the uptake of ETFs.
«ETF – first mover takes all»: Where is the opportunity for Franklin Templeton?
There is much room to grow for many newer players in the market. We are a good example for that, as we are aiming to become one of the top 10 providers in active ETFs in Europe. Thus, there is room for disruption in the ETF market if you manage to stand out with your product line-up and services. All our ETFs have certain unique features. For example, our ETFs on individual emerging markets. We have launched cost efficient country ETFs on India, China, Brazil, Taiwan and South Korea (0.19 percent for the first three and 0.09 percent for the latter). Our customers are currently also interested in an ETF that allows investors to invest in the development of Asia without having to include China or Japan. Many investors are watching the space when it comes to China and some are instead focussing on India: we have seen a lot of interest in the subcontinent recently. Demographics and business-friendly policies are among the factors in India's favour. Lastly, Swiss banks and asset manager are seeking to diversify ETF providers.
What is your opinion on Crypto ETFs and their potential launch, not only in the US but also in Europe?
Our digital assets team believes that cryptocurrency ETFs may become an alternative asset class that offers growth opportunities to investors and acts as a diversifier to equity and bond exposures. Many investors may want to have a small portion of their portfolio held in crypto assets. In the US, the SEC allowed the launch of bitcoin spot ETFs European regulation currently does not allow the launch of such ETFs. Here, we, first and foremost, want to leverage our firm’s DNA, i.e. focus on emerging markets, US equities and active ETFs. Furthermore, we are also focusing on more customized products for clients.
Caroline Baron has been the Head of ETF distribution EMEA at Franklin Templeton since 2018. Previously, she worked at Invesco PowerShares as the Head of UK Distribution. Furthermore, she spent a considerable amount of time at BlackRock in the position of Director of Wealth of iShares ETFs in the UK market. Her other career stops consisted of IFX Markets, Calyon, and Credit Agricole Indosuez. Baron obtained her degree from ESSCA in France and has the AMF Certification.
