ABOUT THE SPEAKER Nik Bienkowski Co-Founder HANetf Key Topics For - PowerPoint PPT Presentation

ABOUT THE SPEAKER Nik Bienkowski Co-Founder HANetf

Key Topics For Today State of the European Fund and ETF Market • European and US ETF Market Compared • Opportunities for ETF Issuers in Europe • Considerations for Launching ETFs in Europe • Distribution of ETFs in Europe • Conclusion •

State of the European Fund and ETF Market

State of the European Funds Market Europe Is World’s Second Largest Funds • Market – Roughly 31% of Global Assets Europe Is World’s Second Largest ETF • Market - Roughly 17% of Global ETF Assets Total Funds AUM Up 6% in Europe in 2016 • Total ETF AUM Up 13% in Europe in 2016 •

State of the European Funds Market Investment Funds Represent 52% • of AUM, and Discretionary Mandates Make Up The Rest European UCITS AUM Totals • Approximately 8.7trn, with the Balance in Alternative Investment Funds (AIFs) Over 30,000 UCITS Funds Exist In • Europe

State of the European Funds Market Passive Investments, Though Successful, Still Have Room To Grow Index Assets Represent Roughly 12% of European AUM vs. 30% in the U.S. ETFs Earned 60% of Net Index Cash Flows Over Past 10 Years

State of the European Funds Market Bonds Account for the Lion’s Share • of the European Investment Portfolio managed in Europe, Outpacing Equities. That Position Has Remained Steady • “Other” Strategies Are Growing • Fast Source: EFAMA

State of the European Funds Market Since 2008, the Share of Cash and • Money Market Instruments Has Declined Sharply From 16% to 7%. Other Assets – Including Real • Estate, Hedge Funds, Structured Products and Private Equity – Have Soared Source: EFAMA

State of the European ETF Market As of June 2017: 2,286 ETPs • 5,896 Listings • 60 Providers • 27 Exchanges • 65% of AUM is in Equities • Top ETF Issuers By Market Share: • BlackRock: 46.4% (€253b) • db X-trackers: 9.8% (€53b) Source: ETFGI • Lyxor: 9.3% (€51b) • UBS ETFs: 5.5% (€30b) • Amundi: 4.6% (€25b) • Vanguard: 4.4% (€24b)

New Entrants To European ETF Marketplace With record inflows has come record new launches and new developments, including: New Issuers: • WisdomTree, China Post, BMO, Fidelity Pending Issuers: • JP Morgan, Franklin Templeton, Goldman Sachs, Multiple Chinese Asset Managers New Product Themes: • ESG, Factors, Thematic Source: Morningstar

European Vs. US Market Features Europe US Product • 2286 ETPs - $686bn AUM • 2041 ETPs - $2,973bn AUM • Share class currency hedging allowed • Share class currency hedging not allowed UCITS regulations don ’ t allow single assets (e.g. gold) or more than 2x leverage • 3x leverage and gold are possible in a fund-like structure • Synthetic replication possible Synthetic replication only possible as a CPO • • Issuers • Primarily banks & asset managers • Dominated by asset managers • Start-up issuers uncommon (exceptions include ETF Securities, Boost, Think) • Start up / entrepreneurs more common (PowerShares, Global X, Direxion, etc…) Single product companies not possible One-off entrepreneurs possible: HACK • • Investors 80/20 split institutional/retail 50/50 split institutional/retail • • Regulators • EU trying to be consistent but not all countries are in the EU • Multiple regulators but rarely are regulations contradicting • Local differences still exist, e.g.: active ETFs (portfolio disclosure), bitcoin (how to treat it), commissions, iNAV, trade reporting Distribution • ETPs must be registered in each country for pubic sale • Single market • Retail investors prefer to buy a locally listed product in local language & currency • Common tax rules • Marketing is country specific, local languages vary • Common language Tax rules differ by country and investor type Single marketing strategy • • Trading & Market makers can be paid by the issuer to support their products Market makers cannot be paid • • Settlement Liquidity is spread across multiple exchanges (27) in different countries Liquidity focused on three Exchanges • • • Each ETF is listed on average on 3 different exchanges • One settlement system through DTCC and common rules Multiple trading lines in multiple currencies + multiple share classes One main trading currency (USD) • • Settlement occurs in local country depots, with different buy-in rules and fines. Market Approx. 70% of ETF trading done on exchange • • makers need to move inventory between markets All trading reported to consolidated tape • Approx. 70% of ETF trading is OTC with 30% being on-exchange • Platform High barriers to entry Lower barriers to entry • • Regulation and compliance infrastructure required across multiple jurisdictions Common regulation and compliance requirements • • Multiple domicile options – Dublin, Lux, plus other EU countries Common domicile • •

Retail vs. Institutional Growth In Europe The growth of the European ETF market • remains driven by demand from institutional investors. Fund distribution channels, particularly in • Continental Europe, remain dominated by commercial banks, which have traditionally favoured the placement of high-margin products. Many of the large fund platforms serving • financial advisors—particularly in the UK—have been reluctant to undertake the necessary Source: Analysis by The Vanguard Group, Inc. using data as at June 30, 2012, from The investment in technology that is required to Vanguard Group, Inc., Bain & Co. and Investor Economics. UK / Continental Europe Institutional classification includes Wealth Managers. facilitate the distribution of funds that trade on an intraday basis like ETFs. Short of the pending regulatory changes, the • status quo is being challenged by the growing popularity of robo-advisors.

Opportunities For ETF Issuers In Europe

Opportunities For ETF Issuers In Europe 2nd largest ETF Market: • Tailwinds behind global ETF market, rising tide • Europe is the 2nd largest ETF market and growing at ~20% p.a. • Access untapped demand • To target a larger share of growing global flows, you need to be in the largest markets

Opportunities For ETF Issuers In Europe Market Structure Evolving: • Commissions still allowed in many countries … for now • Not all platforms accept ETFs … but that’s changing fast. • Retail investors account for approx. 20% of ETF AUM. Set to grow fueled by RDR, MIFID II and the growth of robos • European banks developing their D2C platforms and making ETFs available for the first time • Small % of local AMs offer ETFs, but this is changing fast. Time is ripe now to get in before too late. • Structured products are becoming more regulated with hidden fees being attacked

Opportunities For ETF Issuers In Europe UCITS Is A World-Renowned Wrapper: • Add UCITS solution to ”star” local products, making Asset Managers offering global – UCITS can be preferred to 40 Act funds by many LatAm, Asian clients • Many US wealth managers need UCITS for “offshore” client portfolios • Access local investors with tax and legal friendly wrapper – US ETFs can be disadvantageous • Offers ability to add extra share classes to same fund, which is not possible in the US

Regulation Favoring ETFs • Positive regulatory changes along with continued favour for low cost passive investment solutions is driving ETF AUM growth • Regulations are focusing on increased liquidity, fees, commissions, benchmarks, and transparency • In the retail market, regulation such as MiFID II and the Retail Distribution Review (RDR) is helping to bring more individual investors into the ETF market. MiFID II is bringing liquidity to exchanges: under the Directive, whether the trade is onscreen or done via OTC, it will be printed, so the market will see the whole spectrum of liquidity. • The UK’s FCA published the Asset Management Market Study Interim Report in November 2016 and the key theme coming from the report is that actively managed funds are underperforming their benchmarks after costs are deducted.

Regulation Favoring ETFs • MIFID II is an important and wide-ranging pan- European piece of legislation that will support ETF growth Focus on increased transparency is expected to strengthen • the case for ETFs ETFs will be captured by post trade reporting requirements • 50% to 80% of ETF trading volume is traded OTC, most of • which is currently unreported A European consolidated tape would increase • transparency around ETF liquidity and help drive AUM Looks to address concerns around commission based • advisory models

Considerations For Launching ETFs In Europe