Data from Autorité des Marchés Financiers found that ETF retail adoption grew by 18% in France in 2023, up from 250,000 in 2022 to 296,000 last year, and Christopher Mellor, head of EMEA ETF equity product management at Invesco, argued “retail investors will be one of the main drivers of the next phase of ETF growth”.
Monika Calay, director of passive strategies at Morningstar, added: “The landscape of ETF retail investing is undergoing a transformative shift, with digital platforms in Europe emerging as a critical client segment.”
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Timo Toenges, head of iShares EMEA digital wealth at Blackrock, explained the commission of free digital wealth offerings were contributing to the “rapid” rise of ETF retail investing in Europe, and ETF savings plans are a key example of this.
ETF savings plans were defined by iShares as a standing order to buy ETFs, allowing investors to contribute monthly in small increments.
Toenges noted they include the “innovative ability” to execute fractional trades, which allows investors to purchase fractions of ETF shares, making regular investing more accessible than having to acquire a full share on each occasion.
Research commissioned by iShares in September 2023 revealed the number of ETF savings plans grew from 158,000 contracts in 2014 to approximately 6.6 million contracts by the end of 2022.
It predicted that by the end of 2023, there would be 7.6 million savings plans executed, with most of them coming from Germany.
By 2028, the number of savings plans in continental Europe is predicted to rise to 32 million, according to iShares.
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“We see key players reacting to the growing popularity of digital wealth offerings in these markets, with Saxo and Nordnet launching ETF savings plans in the Nordics, and Monzo introducing different models to cater to the needs of investors in the UK,” said Toenges.
Lotfi Ladjemi, senior sales specialist in the UK and Ireland at Franklin Templeton, explained that ETFs lends themselves well to new technologies and interfaces, such as savings plans, due to the structure’s low cost and diversified portfolios.
Morningstar’s Calay noted there is currently a strong appetite for more direct business-to-consumer models, and ETF providers are adjusting by creating digital solutions to meet retail investor demand.
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“ETF providers are reevaluating their business models to better attract retail investors. This includes addressing concerns like handling individual complaints and refining their retail investment strategy and infrastructure,” she said.
“Additionally, firms are undertaking several innovations to appeal to retail investors. A major focus is developing user-friendly digital platforms and apps that provide a seamless investor experience.”
Caroline Baron, head of ETF distribution, EMEA, at Franklin Templeton, said ETF awareness may also accelerate this year as younger generations start inheriting pools of wealth and use ETFs to manage assets.
“The untapped opportunity set for retail investors within the ETF space in the UK and Europe is growing slowly but surely,” she said. “This may develop into a significant growth area in the future.”
Impact of rate cuts
Last year, fixed income ETFs saw increased popularity and Hal Cook, senior investment analyst at Hargreaves Lansdown, explained this is likely to continue with retail investors over 2024 due to possible rate cuts.
“With higher yields now and a central bank pivot ongoing, this makes sense,” he said. “This might mean that there is greater demand for fixed interest ETFs as the year progresses, ahead of what could be the start of a meaningful interest rate cutting cycle.”
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Toenges added that retail investors might take advantage of the higher interest rates at the beginning of the year, as the anticipation of rate cuts may lead them to lock in higher yields while they can.
Dan Coatsworth, investment analyst at AJ Bell, said the anticipation of rate cuts could be the catalyst to encourage people to switch out of cash and into investments such as ETFs in 2024.
“Investors who locked into one- or two-year cash savings rates might want to find a better home for their money if they roll onto a lower-paying deal,” he said.
“This could bring fresh thinking and potentially see more investors want to take the low maintenance route of having a market tracker fund via ETFs rather than having to research which active fund, investment trust or individual stock to consider.”
