European professional investors have indicated a significant appetite for the introduction of defined outcome ETFs on the continent, according to research from London-based white-label ETF issuer HANetf. Hector McNeil, Co-Founder and Co-CEO of HANetf.
Defined outcome investing refers to an investment strategy that shapes the potential outcomes of a reference asset or index to fit specific protection and return levels, allowing for a more controlled investment experience.
So far this type of investment strategy has primarily been offered through structured products in Europe. Over the last few years, however, defined outcome ETFs have taken off in the US, highlighting a potential opportunity for European ETF product developers.
HANetf, which has reported multiple requests from asset managers and banks to provide defined outcome ETFs on its platform, commissioned a survey in June 2021 of 100 professional investors across the UK, Germany, and Switzerland to validate this potential demand. Survey respondents included institutional investors, hedge fund managers, fund managers, IFAs, and wealth managers.
The research found that investors are interested in a variety of defined outcome investment approaches. Two-thirds (68%) of investors identified an immediate or future need for income-enhancement strategies, perhaps unsurprising given the current low-rate environment, while 63% indicated a current or future interest in upside-enhancement strategies.
Furthermore, approximately half (53%) said they have an immediate or future need for target-volatility strategies, and 46% demand capital protection strategies.
Despite clear interest in defined outcome investing, 93% of respondents noted that a particular wrapper, such as a bank note or certificate, would prevent them from currently considering these strategies.
These results appear to reflect investors’ concerns over the inherent credit risk associated with the issuer of the structured note. ETFs, in contrast, are bankruptcy remote vehicles that hold physical assets or collateral – more than three-quarters (79%) of investors indicated they would consider using ETFs to implement a defined outcome strategy.
Reflecting the size of the market opportunity, the survey found that more than half (56%) of investors would allocate between 5% and 10% of their portfolio to defined outcome products with a further 16% anticipating allocating more than 10%.
The most popular benchmark identified for defined outcome strategies was the Euro Stoxx 50 with more than half (54%) of investors expressing interest in this index. Other popular benchmarks included the S&P 500, noted by 48% of investors, and the FTSE 100, with 44%. Just 19% would like to see defined outcome products based on the MSCI World.
Hector McNeil, Co-Founder and Co-CEO of HANetf, said: “The global structured products market is worth more than $7 trillion, on a par with the global ETF market, so it makes sense that investors are happy to consider defined outcome ETFs and that ETF issuers are looking at the market. This is especially attractive for end investors who prefer the reduced counterparty risks that ETFs offer versus structured products.
“Innovation is central to the expansion of the ETF market globally, and HANetf is committed to constantly expanding the options for investors by bringing new products and investment solutions to market.”
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