ETFs: Challenges of fragmentation in a growing market


Exchange Traded Funds (ETFs) have become, and remain an increasingly popular choice for investors. Whether for their low fees, their diversification or their transparency, ETFs are playing a key role in private and institutional client portfolios alike.

The latest Goodacre UK Industry survey based report featuring views of companies involved with the ETF market aims to identify the consensus towards ETFs from established market players.

Key survey findings:

  • Low fees are the most important factor attracting investment;
  • Offering price transparency is one of the key advantages of ETFs;
  • ETFs to take over from actively managed funds as most popular investment in the UK;
  • Increased regulation will make no difference to ETFs popularity;
  • Doubts as to whether ETFs should be used as a lending asset class;
  • Market risk is among the biggest threats.

This paper points out that the ETF landscape is rapidly evolving as more products debut on the market, and an increase in regulatory requirements for more transparency on costs come into effect. Care needs to be taken to not to imply greater liquidity than the underlying assets.

Challenges of reaching full potential

The fragmented nature of our capital markets is among the key challenges standing in the way of ETFs reaching their full potential. Both due to the fact that ETFs are traded across geographically diverse exchanges in Europe, and to the fact that there is fragmentation between retail investors, who mostly trade on an ‘on-exchange’ basis, and institutional investors, who are generally trading “over the counter” at more favourable prices.

Higher liquidity and transparency

Clearstream is supporting joint market initiatives to bring more European ETF trading on to exchanges could not just bring costs further down, but the market would also benefit from advantages that include higher liquidity and more transparency. As this will not happen in the short term, Clearstream already ensures today that every investor type has its preferred channel or the required order mechanism in place.

Clearstream also offers an international issuance model for ETFs addressing the fact that ETFs are listed in multiple exchanges and thereby improving liquidity, reducing cost and speeding up realignments within Europe.

About Goodacre

Goodacre UK is a leading specialist business and technology consultancy working exclusively with regulated companies and suppliers in the UK financial services sector. Its client base includes many of the leading market participants, banks, wealth management firms, regulators, stock exchanges, data providers and system suppliers.