The democratization of finance with ETFs

ETFs (Exchange traded funds) celebrate 32 years of existence in 2022. An anniversary barely noticed on the markets. Yet ETF trading flows are accelerating and have never been higher. “Last year, in Europe, the ETF market attracted more than 200 billion net dollars,” observes Olivier Paquier, head of EMEA distribution of ETFs at JP Morgan AM.

Historically, ETFs appeared as trading tools to access index management, that is to say a form of management that aims to replicate the performance of a basket of stocks or bonds. Since the early 2000s, however, ETF investors have demonstrated a curiosity for other types of management.

“In recent years, many investors have turned, for example, to fundamental active management which aims to outperform indices with a risk-return pair and different time horizons”, notes Olivier Paquier. This type of management has the advantage of favoring a human approach, often excluding the use of machines and artificial intelligence.

The interest of private customers

Like fundamental active management, thematic and ESG management have also entered the ETF market. “In view of this multitude of offers on ETFs, we realize that there are more and more customers who participate in this market”, notes the head of EMEA distributions of ETFs at JP Morgan AM.

By their characteristics, ETFs meet the needs of a large proportion of retail investors. In the form of conventional UCITS, regulated and registered for marketing, this type of financial instrument must comply with both asset diversification and transparency obligations. Unlike traditional investment funds, ETFs demonstrate daily transparency of the situation of their portfolios. Information that investors can find on any financial intermediary website. Which leads Olivier Paquier to specify: “An ETF is listed on the stock exchange, ie evaluated in terms of price almost in real time, refreshed every 15 seconds”.

In addition, Olivier Paquier sees another benefit for the individual client at the settlement-delivery level, ie the final phase of the securities purchase-sale process, which takes place via a clearing house in the case of ETFs. “The order is guaranteed by a stock exchange. Then, a clearing house ensures that the settlement is well operated so that, in the event of a default of a counterparty in the market, the clearing house compensates the customer. It is the same operation as with any type of stock or bond traded on the markets.

The development of the European market

The European ETF market encompasses nearly $1.4 trillion under management, with growth rates of more than 20% each year, according to figures from JP Morgan AM. Thus, Europe is positioned as the second largest ETF market, after the United States which, for its part, displays the sum of more than 6,800 billion under management.

Even if the differential remains significant from one side of the Atlantic to the other, “Europe is by far the most advantageous and competitive market in the world from an investor point of view”, explains Olivier Paquier. And this “because it is four times smaller than the American market in terms of size, but for an equivalent product offer”.

Observing a dynamism as well as a competitiveness and a constant innovation of the European market, Olivier Paquier considers that the evolution of the ETF industry pursues its original philosophy of democratization of investments. “32 years ago, it was revolutionary to be able to invest in more than 500 stocks through a single transaction, a single product and a single occurrence of stock market fulfillment fees.” Since then, ETFs have democratized the financial markets for many investors, both individuals and professionals who need simplified access to the markets.

This article is from the Paperjam + Delano Finance newsletter, the weekly meeting to follow financial news in Luxembourg.
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The democratization of finance with ETFs

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