The ETF: the prodigal child of finance?

A prodigal child is a child whose parents have a great deal of imagination (Jean Cocteau)

ETFs (exchange-traded funds) have only been around for 30 years, but they have already flourished, and their future growth prospects look excellent.

The first exchange-traded fund product appeared in Canada in 1990¹. It was followed in the US in 1993 by State Street Global Advisors’ “SPDR S&P 500”, which remains the absolute benchmark as a result of its size (US$430 billion²). Europe followed nearly 10 years later, with for example the first ETF in France to synthetically replicate the CAC 40³, by asset management company Lyxor⁴, owned by Societe Generale group.

These pioneers have since been joined by a number of mega US or European companies, often through acquisitions, resulting in some of the best-known names (Ishares, Vanguard, Xtrackers, Amundi ETF, to name but a few) to which numerous other issuers have been added.

As of 2023, ETFs account for some US$10,000 billion in assets under management, including US$7,500 billion in the US and only US$1,600 billion in Europe, spread over more than 2,500 funds⁵. Although the number of funds in Europe seems excessive, its lower value compared with the US market highlights its potential for growth: it is expected to achieve 12% annual growth over the next five years, to reach US$3,100 billion in AUM by 2030⁶.

In addition to investors' appetite for this instrument, which boasts numerous benefits (diverse exposure, low costs, liquidity, intraday accessibility, portfolio transparency, etc.), ETFs’ appeal can also be explained by its creators' high capacity for innovation.

We must do today what everybody else will be doing tomorrow (Jean Cocteau)

In an environment that is both extremely concentrated (seven issuers enjoy a market share of nearly 90% in Europe⁷) and dynamic (there are forty or so ETF providers in addition to these leaders), innovation emerges as a major differentiator.

The traditional strategies based on the main indices no longer offer enough in the way of levers to enable the main stakeholders to significantly increase their market share, and above all, to create profitable market opportunities for new joiners.

With the technological transformations currently underway (digitisation, the Metaverse, AI, etc.) and the rapid growth of sustainable finance, issuers have a vast space within which to demonstrate their creativity. But the issue of ESG⁸ classified ETFs, which already account for 20% of the market⁹, or ETFs that focus on crypto or new technologies, is not the only approach that issuers are taking to stand out from their competitors.

The development of active management in Europe, the familiarisation with new distribution channels (neo-brokers/neo-banks and platforms), the creation of solutions that make it easier to choose ETFs as part of investment offerings, such as pension plans and life assurance policies, along with numerous other changes, are all drivers of innovation.

First places do not interest me. The ones that interest me are the special places (Jean Cocteau)

Admittedly, the market share rankings are led by the blockbusters, which appear invincible. But this fertile industry is also a showcase for them, as well as for many of their challengers. In addition to growth prospects bolstered by the recent breakthrough of retail, ETFs also provide management companies with the opportunity to demonstrate their inventiveness and to communicate it to others.

But the fact that it is a stimulating world with growth prospects does not mean that getting into it is cheap. Creating an ETF requires a whole system to be put in place by the issuer, its usual service providers (transfer agent, administrator, depositary), and stakeholders specialised in the secondary market: market makers and liquidity providers.

These market makers and liquidity providers allow investors' needs to be met through the continued access to primary dealing, which is not without specific processing features for the administrator and the fund's transfer agent. ETFs therefore require the creation of a special contractual environment and appropriate systems, and the Asset Servicer needs to have a dedicated skill set. This kind of structure, which is vital for helping an ETF provider realise its ambitions, generally creates a strong and sustainable relationship between the two parties.

And although, contrary to what Jean Cocteau says, first place is always enviable, if it is not achievable, the prodigal child's genius undoubtedly provides a special place for its designers and their partners.

Mindful of the experience it has acquired in this area over more than 20 years, Societe Generale has a wide range of constantly changing services designed to provide ETF providers with the best possible support as they develop. Its Capital Markets and Security Services (SGSS) departments, grouped together within the same division, use their respective expertise to create a comprehensive and coherent set of services that are required as a result of the dual nature of an ETF: a fund and a listed instrument.

Read about our ETF Fund Services.

Sylvie Chapelle,
Head of Engineering for Funds Services, Societe Generale Securities Services

¹ “What was the first ETF in financial history and in which country did it appear?” (lefigaro.fr)
² Source: Trackinsight website
³ Histoire des ETF (extraetf.com)
⁴ Sold to the Amundi Group - Fusion effective des entités de Lyxor avec Amundi en France | Le Groupe Amundi.
⁵ Source: ETF GI website
⁶ Source: EY Press Release 01/03/23 – London: “Despite European ETF market decline in 2022, positive inflows and sustained investor demand mean growth forecast from this year onward.”
⁷ Source: Funds Europe “ETFs: Who comes second?” (2022) – Extract: “According to Morningstar, iShares (BlackRock’s ETF franchise) remains the undisputed market leader across the European ETF market, with a colossal 44% of market share. To highlight its dominance across Europe, BlackRock’s market share is equivalent to that of its six largest competitors combined.”
⁸ ESG: Environmental, Social and Governance criteria
⁹ Op. Cit. EY Press Release. March 2023