Image Source: Pixabay

Market observers fretting over the lack of new ETF launches in Europe are discussing myriad reasons for the lack of products in the pipeline. My view on the reasoning for this is somewhat simple. The current market environment—with increasing interest rates and somewhat unpredictable markets—holds ETF promoters back from bringing new products to market.

One consequence of tighter monetary policies introduced by central banks on both sides of the pond is that seed money—which is needed by literally all ETF promoters—faded away when interest rates moved up. This is because central banks and other institutions starting to pay interest rates meant that (investment) banks got a decent predictable return when parking their cash in central bank or other accounts. In turn, this means the risk appetite of (investment) banks has decreased since they no longer must search for alternative ways to earn an income on their free cash. As a side effect, increasing interest rates make borrowing money as seed money more expensive, which has taken this option off the table for ETF promoters as well.

Why is seed money needed? Seed money gives an ETF a decent asset base so that it becomes attractive for institutional and other professional investors who may face restrictions on the size of ownership they can hold in single products. Conversely, seed money gets removed (in some cases step by step) once the respective ETF has reached a given target size.

Another reason why ETF promoters might not have launched so many products so far this year might be the current general market environment since no promoter wants to launch new products shortly before a market downturn. Therefore, the ongoing fears over possible recessions in the leading global economies may hold ETF promoters back from launching new products.

That said, from my point of view it seems like the current restraint from European ETF promoters when it comes to launching new products is simply driven by the current market environment and has nothing to do with a possible lack of innovation or a maturing industry. Rather, the opposite is true. I am expecting a high number of new ETFs to be launched once the outlook for the markets becomes clearer because I have learned from conversations with ETF promoters that they have a lot of ideas to enhance their current ETF offerings.

More By This Author: