It is obvious that ETFs are booming in Europe, as the assets under management (AUM) in these products reach new record highs literally month after month. Even more important, the estimated net flows into ETFs in Europe have reached a new level too. This means an increasing number of investors are investing their money into ETFs, hence the market is not only growing by assets under management, but also by investors using the product. In this environment it is not surprising that new market entrants enter the European ETF industry.
Obviously, new ETF promoters launch new ETFs. Given the high number of ETFs which are already available in the market, these new ETFs have to compete with existing and newly launched ETFs from the established ETF promoters for market making capacities from liquidity providers and shelf space at common distribution platforms.
Contracting a Liquidity Provider – The Bottleneck Before New ETFs Are Launched
Meanwhile, it is an open secret that liquidity providers have become quite selective when onboarding new ETFs, especially those from new promoters since their capacities to offer seed capital and/or provide ongoing liquidity might be close to their current limits. While established ETF promoters may have respective contracts in place which secure them access to their existing liquidity providers, new ETF promoters have to pitch for a somewhat limited resource.
This means new ETF promoters have to have a strong business plan and ETFs with a good sales story (or as professionals say a unique sales proposition – USP) to convince liquidity providers to sign a respective contract with them.
When the Distribution Platform Becomes a Competitor
One of the main drivers for the success of ETFs in the retail segment was the free trading of ETFs. Hence investors did not have to pay fees for the execution of ETF saving plans and for buying orders. As trading costs play a major role for the overall return of an investor’s portfolio, no trading fees mean that even the smallest amount could deliver market returns and the distribution platforms took advantage of this as they introduced fractional shares, which meant that retail saving plans could start from €1.00. Yes, the minimum saving amount was one euro, which enabled all kinds of investors to build a broadly diversified portfolio, even as they may have only very small amounts to invest on a monthly basis.
The Effect of the Ban of Payments for Order Flow (PFOF)
The transaction fee waiver was made possible by payments for order flow (PFOF) made from a broker (market maker) to the respective platform. PFOF were banned by the European Union via an amendment to the Markets in Financial Instruments Regulation (MiFIR) from March 28, 2024, (Germany was granted an exception until June 30, 2026) and in the UK via a statement from the Financial Conduct Authority (FCA) which said that PFOF is in general not compatible with the inducements and best-execution rules which came into force in May 2012.
The missing income from the payments for order flow would mean that the trading platforms can’t provide any kind of transaction cost-free saving plans for their customers anymore without risking a massive increase in operational costs. In turn this means it doesn’t make sense for their customers to stick to smaller savings plans since, for example, a transaction fee of €5.00 would still be a 10% fee for a regular investment of €50.00.
Finding New Streams of Income
To keep transaction costs as low as possible, (some) distribution/trading platforms have introduced new fees like shelf, service, and/or maintenance fees, etc., which are paid by the ETF promoters to have their ETFs listed on the respective platform. If the promoter wants an ETF to gain more visibility on a given platform, the operator may charge a marketing fee. Free buying orders (either as saving plan or once off orders) in a specific ETF or a group of ETFs are a good example of this, as these special offers give a lot of visibility to the respective ETF or ETFs, as well as to the promoter. The bad news for the investor is that these kinds of special offers stop when the budget allocated to the offer is used up. This kind of special offer is also a good promotion for the trading platform itself, since the platform can use this offer for their own marketing.
Another version of this are preferred partnerships between trading platforms and ETF promoters, which may in addition to any marketing campaigns, give more visibility to the respective promoter on the platform. Hence, these partnerships shall help to generate inflows and leverage the brand of the respective ETF promoter.
Co-Branded ETFs as New Source of Income
With this in mind, it was not surprising that Scalable Capital launched a Scalableco-branded ETF in partnership with Xtrackers, the third largest ETF promoter in Europe. The launch of its own ETFs allows Scalable to capture some of the management fees.
When it comes to this, it is not surprising that other trading platforms such as flatexDEGIRO (Xtrackers), comdirect (State Street SPDR), or ING DiBa (Amundi) are doing the same. Other platforms such as the Scandinavian Nordnet are going a step further by launching its own ETF platform (in this case with Carne Group as management company). Current rumors say that Revolut is also planning its own ETF platform.
These co-branded or platform-owned product ranges will compete with the ETFs from established and new ETF promoters and I am sure that the platforms will put their ETFs front and center on their platforms to gather money. This means they might be able to get more attention from investors than ETFs from a new promoter who may operate on a thin marketing budget to support the sales of their ETFs.
Summary
To sum this up, it looks like the air in the distribution ecosystem gets thinner even as ETFs fly from one record for net flows and/or assets under management to another. This means that it will be harder for new ETF promoters to gather significant amounts of money.
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