Moody’s, the ratings agency has published a report that states passive funds and ETFs will account for nearly a quarter of all assets under management in Europe by 2025, mainly due to the strong demand from institutional and retail investors for ETFs.

The report is called ‘Asset Management—Europe: ETF growth will propel European passive funds towards 25% market share by 2025.’ 

The ratings agency has predicted that that passive funds and ETFs will grow from 14 to 22 percent of assets under management. In its fast case scenario, it predicts Europe’s assets to rise to 27 percent.

Moody’s states: “Asset managers with passive capabilities, such as BlackRock, DWS and Lyxor will benefit from this growth phase and continue to grow their market share.”

So far retail investors demand for ETFs from Europe, has been much weaker compared to US demand. However, Moody’s believe this will change due to the implementation of MIFID II that was introduced back in January 2018.

MIFID II provides clearer visibility when it comes to the fees charged by active funds and banned funds from paying commission to financial advisers This ban on retrocessions had been in place in the UK since the Retail Distribution Review was passed in 2013 now encompasses all of Europe.

The result is that investors are drawn towards cheaper passive funds, including ETFs, which will be bolstered through their increasingly availability through investment platforms and robo-advisers.  

Marina Cremonese, an analyst vice president and senior analyst at Moody’s said: “ETFs will become a core part of institutional investor portfolios in the next five to 10 years due to their flexibility, liquidity and competitive cost. Institutional investors can use them for tactical adjustments, as a hedging and diversification tool, and increasingly as a component of a broader investment solution.”