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An innovative tie-up between Europe’s dominant third-party exchange traded fund platform and a giant of the US market has been heralded as a breakthrough paving the way to greater choice for investors on both sides of the Atlantic.
However, the deal may also signal the difficulty of getting a so-called “white label” ETF business off the ground in a fragmented European market, with its multiplicity of countries, currencies, languages and regulatory regimes.
White labellers provide services such as distribution, marketing, capital market support, custody, compliance, seed funding and administration, helping smaller fund managers launch ETFs more quickly and cheaply than they could do on their own.
The concept has seen rapid growth in the US, with the likes of Tidal Financial Group, Exchange Traded Concepts and Alpha Architect offering more than 150 ETFs on their platforms.
In October Goldman Sachs unveiled the first ETFs on its own Accelerator, which has many similarities to white-label platforms, although Goldman insists it is instead a “service provider”.
However, London-based HANetf has dominated the European market for the past six years and currently offers 33 ETFs with combined assets of $2.7bn.
HANetf and Tidal have now announced their own transatlantic partnership, allowing their respective clients to launch ETFs on the opposite side of the ocean.
“We believe it is pretty amazing for an asset manager to be able to launch ‘40 Act and Ucits on or about the same day. That gives you the whole world basically,” said Hector McNeil, co-chief executive of HANetf, referring to the respective fund structures.
The deal does, though, appear to signal the end of Tidal’s ambitions to enter the European market under its own name.
“Tidal does not plan to create a white label provider in Europe that would compete with HANetf,” said Mike Venuto, co-founder and chief investment officer of Tidal. “Tidal is entering the European market in partnership with HANetf to offer its clients a global solution.”
The development comes as a raft of rival aspirants in the European market have made only modest progress, if any at all.
Dublin-based financial services company Waystone has the advantage of providing support services to ETF issuers, such as passporting and registering funds, help with listings, capital market activities and structuring activities.
Despite this Paul Heffernan, chief executive of Waystone ETFs, said it was still in the process of “onboarding” the first four clients for its white-label business.
Heffernan said Waystone hoped to list the ETFs within “three to four months, depending on seeding discussions”, and was speaking to “a number of large groups that want to bring products to Europe”.
Alongside the four initial managers, “all are in the active ETF space, barring a couple of sophisticated index products”, he added.
“Europe is more complex [than the US], with different countries, currencies, languages, buyer behaviour. Those entering the market in Europe probably need more help than they would in the US,” Heffernan said.
“There is a complexity to the European market that is not easy to build from the bottom up.”
Luxembourg-based Axxion, which serves Europe’s German-speaking market, currently has one ETF on its white-label platform: the €27mn Frankfurter Ucits ETF — Modern Value.
Benjamin Linn, head of client relationship management, said a second offering, UmweltSpektrum Ucits-ETF — Global SDG Focus, was expected to launch in February.
“We are happy that we will have two and we are discussing with some possible clients that we will launch further ETFs in the next year,” Linn said.
Goldman is also looking to launch in Europe, and told the FT last month that the first fruits of this should appear in the next two quarters.
The concept has also spread to South Africa, where fund administrator Prescient Fund Services plans to have six ETFs on its platform before the end of the year, with more to follow in 2024.
However, Europe’s most successful rival to HANetf thus far may be Leverage Shares. Its white-label platform is focused on exchange traded products, which trade like Europe’s Ucits ETFs but have the freedom to build short positions, sidestep diversification requirements and invest directly in commodities.
Its fourth white-label ETP launched earlier this month and Jose Poncela, head of product, said “more are in the pipeline”, with two more potential launches in January. Model portfolios, commodities and active managers are prominent.
Poncela was unsurprised that more ETF platforms had not emerged in Europe. His view was that white labelling only works for a select group of midsized issuers with total assets of between $500mn and $3bn.
If they have less, a Ucits ETF becomes a “very expensive proposition”, if they have more then it arguably makes more sense to create their own ETF infrastructure. Using ETPs instead at least lowers the minimum, as they are cheaper to create and run.
“US players looking to enter Europe have not always succeeded,” Poncela said. “The investment is very steep and the economics start to degrade. The middle is probably not as big as [potential entrants] estimate.”
Moreover, the European market’s small scale and fragmented nature, compared with the US, makes life harder for white labellers.
“It’s simple to get $50mn in the US, maybe even $100mn. That’s not the case here,” Poncela added. “The fragmentation is still there, the capital markets union is more wishful thinking than reality. You have to go [through countries] one by one. It is a trench war.”
Compared with the US, Europe is “20 times the headache for a fraction of the AUM potential”, said Oktay Kavrak, his colleague.
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