A quiet investing revolution is underway in Europe

According to a study commissioned by BlackRock’s iShares platform, 10.8 million ETF savings plans worth EUR 17.6 billion were executed in 2024, significantly higher than the 7.6m plans involving EUR 15 billion that were in place at the end of the previous year. The trend has been especially pronounced in Germany, where government policy allowing easier access to the capital markets for retirement savings has helped.

The study noted “an increasing number of private investors [in Europe] turning to index-based products as a means of building up their assets”. By the end of August 2024, about two trillion euros had been invested in ETFs in Europe – an impressive 40 per cent increase in volume compared to the end of 2023.

This reflects what we believe is an ongoing, generational shift in investor preferences for the convenience and cost-effectiveness of ETFs, as a way to gain exposure to investment narratives that are defining our age. These run from shifting consumer tastes and sustainability to industrial and technology themes such as AI. Recently, cybersecurity and defence have been added to the mix.

Yet in the UK, the picture is still evolving. While there is huge pent-up demand for savings products, ETF adoption by retail investors remains stuck in the slow lane. We estimate that ETF use is around eight per cent of all UK investors, compared with the US at almost 60 per cent. Yet, there is an estimated £610bn tucked away in cash (based on the FCA’s Financial Lives survey conducted in May 2024) that British savers might channel into investments such as ETFs, if some pipes were unblocked.

One of the barriers to widespread adoption in the UK has been the suboptimal way in which ETFs are purchased.

Let’s say an investor wants to buy £50 worth of ETFs each month via a wealth platform, but because ETFs are traded on stock exchanges in single units (like company shares), this fixed monthly amount will rarely result in the purchase of a round number of units. This mismatch forces the investor to leave cash on the table each time a monthly investment is made – what we call “cash drag”.

That’s not only an inefficient way to invest, it’s also a serious issue when ETFs are used as building blocks for investment strategies, because it’s vital to ensure precision of allocation to achieve the exposure an investor needs.

The solution to this mismatch between what an investor wants to buy and what they expect to achieve lies in a simple but effective concept: fractionalisation.

Leveraging the power of our global custody business and decades of equity execution expertise, HSBC has built an ETF fractionalisation solution for the UK market that aims to give far easier access to ETFs, unlocking this fast-growing asset class to millions of retail investors while providing an efficient vehicle for retirement savings.

Key to the solution is managing the fractional nature of ETF purchases a retail investor makes via a wealth platform, which would hold the fractional shares in a custody account with HSBC, allowing us to manage the remaining fraction of the share as a transaction in our “house book”.

We are also applying a new approach to costs. ETFs often come with brokerage charges that are passed back to investment platforms – and ultimately on to the end-investor. However, we want to level the playing field for retail investors by maintaining a zero-execution cost approach, while charging only custody fees to the wealth platform.

These elements combine to create a powerful package that we think can unblock the pipes that are holding back retail participation, giving investors an efficient way to choose ETFs as an alternative to mutual or traditional funds.

Three factors are likely to encourage them to do so:

• First: cost. While we believe ETFs will not replace traditional funds, we’ve also observed that retail ETF customers tend to be charged about half of what is experienced in traditional funds, based on our internal analysis.
• Second: there is an enormous amount of innovation taking place in the ETF space, with indices being created almost weekly. The breadth of products available is remarkable. Retail investors are effectively getting access to a hotbed of innovation through a cost-effective product that offers seamless convenience – they trade like stocks, they have low costs and they have an underlying basket of assets.
• Finally, we think that the ETF is the product that investors would be choosing if they could get better access to it. The emergence of active ETFs provides a further avenue for access to new investing strategies for retail investors.

At the heart of what we’re trying to achieve is nothing less than the democratisation of investment. That’s why we believe, that in the world of ETFs, fractionalisation’s time has come.