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INVESTMENT FOCUS-Robotics ETF, anyone? Firms float trendy trackers in Europe

Published 2017-04-07, 09:43 a/m
© Reuters.  INVESTMENT FOCUS-Robotics ETF, anyone? Firms float trendy trackers in Europe

* Niche funds track social, demographic themes

* Retail investor share growing

* Private banks dipping toes into thematic trackers

* Institutional investors wait on sidelines

By Helen Reid

LONDON, April 7 (Reuters) - Brisk growth in exchange-traded funds (ETF) in Europe is spurring providers to seek out a new generation of retail investors - by tapping into the lifestyles they espouse with niche products covering everything from fintech to robotics.

Lured by the success of similar products in the United States, the world's dominant ETF market, established players as well as smaller firms are upping their thematic offerings in Europe too, where equities look to be recovering after years of sluggish growth.

BlackRock launched four such funds in September 2016, tracking stocks exposed to healthcare innovation, a global ageing population, robotics & automation, and digitisation.

ETFs are products designed to track an index of stocks without human intervention, which keeps their costs low. Flows into European ETFs hit record highs in the first quarter. most traded ETFs track global equity benchmarks like the S&P 500 SPY (NYSE:SPY).P or STOXX 600.

Thematic ETFs track custom-made indexes of stocks linked to economic and societal trends. While large institutions are waiting for them to gain scale, the popularity of some is growing.

Flows to robotics funds worldwide have surged to record highs this year, Bank of America (NYSE:BAC) Merrill-Lynch said in a weekly report on Friday.

"Index providers are launching these products because they believe the retail market will evolve in Europe," said Andreas Zingg, head of ETF distribution at asset manager Vanguard.

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"You don't have a lot of retail investors that buy ETFs at the moment, but this is going to change, in our opinion."

TRENDY TRACKERS

Assets under managements at European ETFs sit at about half a trillion dollars, a record, while the U.S. market is six times bigger, according to Thomson Reuters data.

Widespread retail investment in equity markets, partly linked to compulsory corporate retirement plans that are heavily invested in stocks, has made the U.S. market ripe for niche products.

Many track social trends and consumption habits, with providers banking on firing the imagination of armchair investors via the trends they encounter in their everyday lives.

A Millennials ETF MILN.O focuses on companies likely to benefit from the rising spending power and idiosyncratic tastes of that generation, and investors can even gain exposure to medical marijuana stocks through an ETF launched this week on the Toronto exchange HMMJ.TO .

According to Goldman Sachs (NYSE:GS), 10 percent of the free float across U.S. stock markets is held by ETFs. In Europe, it is about 2.8 percent - leaving plenty of room for growth.

Vanguard's base case sees an expansion of the retail segment for ETFs from 24 percent in 2016 to 44 percent by 2021. Its scenario for faster expansion sees retail investors making up 65 percent of the European exchange-traded product market by then.

Another route into millennials' pockets being explored are investment apps, which are proliferating in Britain as interest in ETFs grows among younger investors.

"We're engaging with young people who typically are investing for the first time with us," said Ben Stanway, co-founder of the Moneybox app.

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It launched last August, advertising on London's subway for investors to put their spare change into one of three ETFs tracking global equities, property stocks, or cash. The minimum investment is just one pound.

Over half of its customers are aged 25-35, Stanway says.

'CHICKEN AND EGG'

A robotics and cyber-security tracker by ETF Securities ROBG.L was the first of its kind in Europe, picking shares exposed to growth in robotics, from large established companies such as Switzerland's ABB ABBN.S to small-cap entrants.

The possibility of mergers and acquisitions was a main driver in the choice of stocks, said ETF Securities' fund manager Howie Li.

"What we have seen in the last 12 to 18 months is investors breaking down how they construct their portfolios to allow for this type of investment," he said.

Trailblazers in thematic ETFs include private banks, with high net worth investors keen to bet on long-term trends, according to Christopher Mellor, head of sales and strategy at Source ETF, which launched its Fintech ETF on March 10 SOFTEK.L , with just over $13 million under management so far.

But to tempt larger institutional investors into theme-tracking, niche products need to get much bigger.

BlackRock's four trend tracking ETFs have so far collected $289 million in assets under management - just one thousandth of the total for iShares, its ETF arm in Europe.

"Yes, there are these really interesting, funky ETFs out there, but the liquidity is horrible. They are tiny, and there's so many," said Hani Redha, multi-asset manager at Pinebridge Investments, adding, however, that he was interested in themes like robotics, and would consider buying them once they gained scale.

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"It's a chicken and egg situation," he said.

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