Marie Dzanis, head of asset management for EMEA at Northern Trust Asset Management (NTAM), has no concerns about launching an ETF business in Europe despite the challenges a small issuer can face in a fragmented market.
Talk to ETF feeds for the first time since entering the European ETF market in March, Dzanis (photo) highlighted the importance of providing a differentiated offering that plays to the strengths of the asset manager to succeed on the continent.
NTAM’s journey in the ETF market is closely tied to his own career. The company launched its FlexShares range of ETFs in the US a decade ago in November 2011, just six months after Dzanis joined US giant BlackRock where she was part of the company’s recently acquired iShares arm.
After seven years in the US, Dzanis was tasked with leading NTAM’s EMEA business in 2018 and immediately implemented plans to bring the FlexShares ETF range to Europe, which is now among the top 20 issuers in the US. .
“When I came [from the US]I spent over 150 hours interviewing the strategy team to find out what we need, what the gaps are and if there are additional capabilities we can offer investors,” Dzanis said.
One of those gaps was an ETF offering, in a market that has grown 20% a year on this side of the pond since the 2008 global financial crisis to now total €1.3 billion. assets under management (AUM), according to PwC data. .
After the ETF space was identified as a “natural extension” of NTAM’s existing offering of active index funds and separate mandates, the asset manager began hiring ETF specialists in sales and markets of capital throughout 2019 and last year in preparation for its launch.
“We are engaging in the ETF space. It’s been a years-long process and it’s not something you want to do quickly,” Dzanis pointed out. “Europe is a great opportunity.”
That launch, which was put on hold when the coronavirus hit the continent in February 2020, came three months ago as two smart beta ESG ETFs, a far cry from traditional market-cap-weighted ETFs that offer exposure to the S&P 500 or Euro Stoxx 50.
“We will reside in a space that lies between customer needs and our own expertise,” she explained. “Investors need solutions that go beyond traditional beta.”
Differentiating from the market is one of the main challenges facing any new issuer, especially in a market as competitive as the European ETF ecosystem, however, Dzanis seems up for the challenge.
The two ETFs, the FlexShares Developed Markets Low Volatility Climate ESG UCITS ETF (QVFD) and the FlexShares Developed Markets High Dividend Climate ESG UCITS ETF (QDFD), track two bespoke indices designed in partnership with Stoxx.
Using a flexible indexing approach, Dzanis believes, is one of the key areas that will separate NTAM from the rest of the market.
Instead of being tied to benchmarks that already exist and can easily be copied by other ETF issuers, the company uses an index-agnostic approach that works backwards from the outcome it wants to achieve with this strategy right through to the design of the index itself.
“We have a commitment to the flexible indexing process,” Dzanis added.
The other two areas of differentiation are the active quantitative approach – the smart beta – and the company’s ESG rating methodology.
Dzanis said ETFs leverage the company’s history in factor investing and the work that has already been done in the area of index funds.
“Industry definitions vary widely when it comes to measuring factors such as quality,” she continued. “We’ve managed factors through several market cycles, so we have a solid foundation.”
Finally, Dzanis argued that the company’s approach to measuring a company’s ESG credentials – which combines the methodologies of the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD ) – is another differentiating factor.
“By the end of this decade, ESG will just be part of what everyone does,” the EMEA official said.
“There is no doubt that COVID-19 has had a positive impact on interest in ESG. For countries like the Nordics and the Netherlands, this has reinforced long-held values, while countries like the UK are making significant changes. »
Overall, Dzanis revealed that the US asset manager will launch at least one more ETF in the next six months, but stressed strategies should be based on the specific outcomes investors demand.
“Everything we build will focus on the outcomes investors need, whether it’s income, liquidity, risk management or capital appreciation.”
One area of potential improvement for the European ETF market, Dzanis said, relates to standardization. While the US has a supportive ecosystem for ETFs, there remain a number of structural challenges in Europe.
In particular, she pointed to the lack of harmonization between exchanges when volatility increases and circuit breakers trip.
Last March, there were an average of around 3,000 circuit breakers affecting ETFs daily across the five major exchanges, however, the different rules meant inter-listed ETFs were suspended at different times.
“I think it is possible to have more common standards,” concluded Dzanis. “A consolidated band, for example, would be a big plus.”
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