Citigroup unveils plan to power active ETF surge in Europe

Citigroup is launching a European alternate traded fund platform to assist third-party managers enter the quickly rising sector.

The transfer by the third-largest US financial institution to create a “white label” platform threatens to shake-up a sector dominated by smaller specialist gamers, even after Goldman Sachs turned the primary big-name entrant to the platform sector when it launched its ETF Accelerator final yr.

Citi Velocity ETFs will launch within the first quarter of 2025 with the goal of serving to energetic asset managers enter the European ETF market, the place actively managed funds are beginning to make headway in an business beforehand dominated by passive index-tracking automobiles.

“There’s virtually common settlement that the mutual fund wrapper is in terminal decline and as a consequence there are an enormous variety of companies scrambling to suppose ‘What does that imply for us? How can we create an ETF answer?’” mentioned Andrew Jamieson, international head of ETF product at Citi.

The small however rising European marketplace for actively managed ETFs has trailed the extra fast growth witnessed within the US, the place energetic funds appeal to $3 of each $10 of latest cash invested in ETFs.

Lively ETFs accounted for 8.4 per cent of internet inflows to European-listed ETFs within the third quarter, in accordance with Morningstar, effectively forward of their 2.2 per cent share of property. Their mixed property topped $50bn for the primary time, having doubled previously 18 months.

Smaller ETF issuers usually enter the market with the assistance of a white-label platform, which gives most of the assist features, from capital market assist to compliance.

Platform suppliers similar to Tidal Monetary Group, Alternate Traded Ideas and Alpha Architect service lots of of ETFs within the US. HANetf is the market chief in Europe with 34 funds, however a variety of different platforms have struggled to reach critical mass.

Citi is hoping to upend this mannequin by increasing white-labelling to “the world’s largest and most refined institutional asset managers”. It mentioned it had discussions with greater than 40 asset managers — a mix of European mutual fund managers which have but to launch ETFs and US homes which have ETFs in North America however not but in Europe, together with some “large heavyweight managers”.

“Europe is the hotbed of alternative at present,” Jamieson mentioned. “Now we have seen the explosion of energetic merchandise within the US. Now we have seen an enormous uptick of retail [investment] within the US. We expect that may occur in Europe.

Furthermore, Europe is in a “candy spot” as a result of buyers in lots of different elements of the world, together with Latin America, Asia and the Center East, more and more need ETFs sporting Europe’s Ucits wrapper, Jamieson argued.

Greater than 260 fund teams provide ETFs within the US however simply 60 in Europe, in accordance with Bloomberg information.

Jamieson believed the gulf was brought about, partly, by many US issuers being cautious of getting into the extra advanced European market, with its multiplicity of markets, regulators, exchanges, languages, taxes, currencies and distribution guidelines.

The latest US entrant, Janus Henderson, went to the extent of shopping for a smaller European issuer, Tabula Funding Administration, to expedite its entry into the market. Cathie Wooden’s Ark Invest took the identical path final yr when it purchased Rize ETF.

Jamieson believed many US ETF issuers that didn’t need to go down the acquisition route had held again from getting into Europe.

“They’ve a lack of understanding and an absence of sources [in Europe]. They don’t know the way lengthy it’s going to take and so they definitely don’t know the way a lot it’s going to value them,” he mentioned.

Citi’s platform will differ from present white-labellers in offering a wider vary of companies, on condition that the financial institution is already an authorised participant, market maker, swap counterparty, depositary, custodian, paying agent and switch agent for ETFs.

“The one remaining hole was the power to launch merchandise for different folks. We see this as the ultimate a part of the puzzle,” Jamieson mentioned. “It’s a one-stop store”, offering economies of scale and decreasing the product launch timeline from one or two years to 3 to 6 months, Citi mentioned. It declined to be drawn on the pricing construction for the platform.

“Citi Velocity ETFs allows asset managers to concentrate on their core obligations: product thought technology, portfolio administration and distribution. We really feel we’ve got bought a greater mousetrap, a greater answer,” added Jamieson, who mentioned Citi had been engaged on the challenge for 2 years.

Deborah Fuhr, chief govt of ETFGI, a consultancy, welcomed the launch and noticed potential for progress.

Amongst US ETF issuers, “everyone seems to be considering whether or not they need to launch Ucits ETFs”, Fuhr mentioned, declaring that US-domiciled ETFs are usually not tax-efficient for non-US buyers. “[They are thinking about] how they need to come to Europe as a gateway to the world. Ucits ETFs journey higher.”

Nevertheless, she mentioned asset managers wanted to think about the price of utilizing a platform and the portability of their ETFs in the event that they ever determined to deliver them in-house.

Fuhr added {that a} platform similar to Citi’s didn’t assist with distribution, which was “one of many largest challenges” for ETF issuers.

Jamieson was hopeful these obstacles could possibly be overcome. “The variety of energetic ETF issuers in Europe is about to double or triple, as Europe catches up with the US.”