The European Union’s new rules that are set to improve market transparency and strengthen investor protection could help promote ETFs and further grow the industry.
According to ETFGI, net inflows into Europe-listed ETFs hit a record $108 billion in 2017, compared to $55.7 billion in 2016, the Financial Times reports.
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Under the new European regulations, known as Mifid II, detailed reporting of ETF trades came into effect in January. For the first time, pre- and post-trade disclosures on order details submitted and transaction across trading venues in Europe will be published.
Prior to the establishment of these rules, around 70% of ETF trades in Europe were unreported since they occurred in private bilateral, over-the-counter trades.
As a result of these new rules, there has been a “dramatic effect” on the industry, Jürgen Blumberg, head of capital markets in Emea for PowerShares, the ETF arm of US asset manager Invesco, told FT. According to Invesco data, OTC trading volumes have surged to €150m-€250m in January, compared to €50m-€100m last year.
“We believe that the visibility of increased trading volumes will attract more investor inflows into ETFs,” Blumberg said, adding that competition will increase between traditional exchanges and other trading venues such as multilateral trading facilities for ETF order flow. “This should provide investors with a greater choice of brokers, banks and market makers to do business with, which should lead to a more efficient ETF market and improvements in pricing for end-investors.”
As more data is accessible through the new rules, investors who are sitting on the sideline will now have a clearer picture on ETF liquidity and may be more apt to dive in to the market.
“ETF trading volumes have been a bit of a mystery for all market participants. The new reporting requirements provide hard evidence that ETF liquidity is much higher than was assumed by most investors. This should help to persuade more institutional clients that they can use ETFs as efficient tools,” Arnaud Llinas, global head of ETFs at Lyxor, told FT.
Furthermore, the transparency under Mifid II will also help highlight the cheaper costs found in ETFs when compared to traditional mutual funds.
“Transparency on pricing will drive increased demand for low-cost products such as ETFs, particularly among financial advisers and retail investors,” Stephen Cohen, the head of BlackRock’s iShares ETF business in Emea, told FT. “We will see ETFs become a much more significant part of investors’ portfolios across Europe.”
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