European ETFs: an American invasion

Ask most investors to name an ETF, and it is likely a few will come to mind – the world’s oldest ETF, SPDR, tracking the S&P 500 and launched almost 30 years ago; or perhaps, for a UK investor, the iShares FTSE 100 ETF, launched back in 2000, is the one they will recall.

However, for an investor who only has a passing interest in ETFs, it may take them by surprise how much the market has evolved, especially in the last few years. It is still the case that a few providers such as Blackrock (iShares) and State Street (SPDR) dominate the market in terms of assets managed, but the breadth of products is now much wider than market-weighted regional equity indices.

Within the AJ Bell portfolios, we take a more granular approach to our asset allocation process to ensure greater diversification. This is only possible due to the proliferation of providers and products in the European market, and the unfettered nature of our portfolios, not tying us down to a single provider. This article introduces three US-based ETF providers you may not have been aware had entered the European market, and the products they provide.

Franklin Templeton

Franklin Templeton has been around since the end of the Second World War and has established itself as one of the largest asset managers in the world, with assets over £500bn. In particular, it is known as a specialist in emerging markets, with the team here formed back in 1987. Although traditionally an ‘active’ manager, it launched an ETF operation called LibertyShares – the UCITS vehicle – in 2017. After struggling to raise assets in this range initially, it has found success by leveraging its emerging markets heritage, now managing over $1bn of assets in Europe, with the majority of these held in its single country EM products, offering exposure to Brazil, India, China or South Korea. All four are priced at less than 0.2% and track a FTSE index. With different performance drivers across different emerging nations, we use these ETFs at AJ Bell to give us exposure to the countries that we believe offer the best risk and return profile.

Fidelity International

Another US behemoth, managing over $250bn, Fidelity International outsources the management of its index products to a company called Geode, which once was part of Fidelity but is now independent. Geode manages nearer $700bn in assets. Traditionally in the UK, it is known for its index funds, however in 2017 it also entered the European ETF market. Looking to carve out a niche, it focused on ETFs that invested in companies with high quality characteristics such as low leverage and high return on equity, and then applied a secondary filter to focus on higher dividend paying companies within this quality-focused universe. This process is similar to how many active managers build income and growth strategies. It allows an investor to access a potentially higher yield, whilst avoiding value traps at a lower price point compared to an active fund. We use ETFs in this range within our income-focused funds.

JP Morgan

JP Morgan entered the ETF market in 2014 in its home market, launching its first UCITS ETF in 2017. It looks to offer a range of products, ranging from low-cost ‘market beta’, all the way to ‘active’ ETFs. However, the range we use in our portfolios represents a halfway house. Commonly referred to as ‘smart beta’, in straightforward terms this means a strategy that is still fully quantitative, following a defined set of rules, but the rule set is more complex than just weighting based on company size, and instead focuses on other characteristics such as P/E ratios, leverage and price momentum. We feel this approach works well for high-yield bonds, as it provides some extra checks on the bonds, which by design are riskier than investment-grade bonds. This ETF is available for an ongoing cost of 0.35%. As such, it is actually cheaper than the largest ‘passive’ high-yield ETF in the European market.

Although the Passive MPS range has ‘passive’ in its name, this really refers to the use of ETFs and index funds. We take an active approach to our asset allocation and picking the building blocks we use. As more and more providers enter the market, not only do we see price pressure, but perhaps more importantly product innovation. Within our MPS, we keep on top of the ETF market, so you don’t have to. If you would like further information, please get in touch with your Business Development Team.