The growth of exchange-traded funds (ETFs) has been unprecedented in modern financial times, with data revealing a more than 20-fold increase in ETF net asset value since 2005.[1] Today, we are in the midst of the next evolution of ETFs, with significant regulatory and economic uncertainties on the horizon. For ETF issuers, then, potential headwinds such as rising interest rates, as well as the imminent adoption of T+1, underscore the importance of having a proper banking partner in place.
Indeed, the rapid pace of ETF development represents a significant opportunity for well-positioned integrated banks. Once a purely passive investment product, ETFs are now well entrenched within the actively managed space, the result of managers seeking a wider distribution footprint in the wake of recent outflows and investors pursuing the added security of a more hands-on approach.
Additionally, ETFs continue to transform the investment culture with an increasingly diverse array of product offerings. A recent BNP Paribas poll found that nearly two-thirds of European investors continue to support thematic approaches such as ESG-based ETFs, due to the perceived positive impact on climate and other societal concerns. The same survey also revealed a growing appetite for ETFs among wealth management and private investors, as well those seeking a gateway to international markets.[2] All of these developments represent a dramatic shift in the ETF ecosystem, as well as a catalyst for new methods of servicing going forward.
Optimising ETF efficiencies across multiple markets
When ETFs debuted some 30 years ago, the standard settlement cycle was a generous five days post-transaction. Next year, however, North American markets are expected to make the long-awaited move to T+1, putting the onus on participants to improve data transmission and communication to ensure the speed and accuracy of ETF settlements.
Given their longstanding reputation as a cost-efficient investment strategy, it is crucial that ETFs find ways to contain unnecessary expense, particularly as the cost of capital rises. An integrated bank has the ability to offer clients a holistic view of the entire ETF lifecycle, covering trading and settlement, in addition to collateral and custody. Having a banking relationship where all functions are coordinated and work cohesively across skillsets optimises ETF issuers’ product viability within the marketplace.
Because ETF product penetration and regulatory guidelines can vary from one market to the next, as an integrated bank BNP Paribas has been able to tailor its ETF service offering to the specificities of a particular region. This has allowed the Bank to bring its capabilities to a wide range of countries including France, Luxembourg, Germany, Brazil, Australia, Hong Kong, New Zealand and, most recently, Ireland. Leveraging its multi-local banking model, BNP Paribas’ Global Markets team offers guidance into how funds may be impacted by local factors, while the Bank’s Securities Services division provides clients with specific detail around the ETF’s post-trade mechanics.
Integrated ETF servicing is the answer
Even after a tumultuous 2022 which saw significant fund outflows due to sustained market turbulence, through March of this year ETF inflows remained on a record-setting pace, according to BNP Paribas data, as investors continued to take advantage of these highly liquid, low-cost and versatile products[3].
To capitalise on this seemingly insatiable demand, current issuers, as well as those looking to make their ETF debut, will require the expertise of a capital-markets professional with proven technical and relationship-management skills. An integrated bank provides a unique perspective into the nuances of ETF investing covering both trading and client requirements. This consultative approach includes walking the ETF issuer through the launch process, especially helpful at the beginning of the ETF journey. Reducing the cost of ownership, providing highly accessible data as well as conducting regular systemic checks and balances are just some of the advantages of an effective ETF servicing model. With forecasters calling for sustained ETF growth and continued diversification in investment strategy, it is paramount that issuers ready themselves for the near-term changes and challenges that lie ahead for the ETF industry in order to fully reap the benefits over the long haul.
[1] Investment Company Institute data
[2] Quantalys Harvest Group ETF Management Observatory/BNP Paribas Asset Management
[3] Quantalys Harvest Group ETF Management Observatory/BNPP AM data