Leaders in Finance: UBS on ETFS

On December 2, 2024, officials from UBS South Europe met the Master in Corporate Finance class.

Alessandra Calabretta, expert on ETF and Index Funds Sales, pointed out that the European ETF market has been on an extraordinary trajectory, with assets under management (AUM) skyrocketing past €2 trillion by May of 2024. Over the past decade, the market has quadrupled, boasting annual growth rates of 17.6%. Italy is keeping pace with Europe’s explosive growth, cementing itself as one of the continent’’ largest ETF markets. Italian-listed ETFs have grown in market value from €34.3 billion in 2014 to €121.5 billion in 2024, representing more than 6% of the European market. While Europe is catching up fast, the U.S. remains the global leader in ETFs, thanks to its early adoption and scale.

Interestingly, ETFs trace their origins to Canada, but the real buzz now is around active ETFs, which are gaining ground in both the U.S. and Europe. Even as the broader market grows, emerging market ETFs have been the exception, struggling due to interest rate hikes, mainly in the U.S.

The battle between active and passive ETFs is a hot topic. Passive funds have consistently outperformed active ones, and the reasons are clear: lower fees, reduced competitive friction, and regulations forcing active managers to stay fully invested even when they would not do that. European ETFs’ TER typically hovers around 20 basis points, while sustainable ETFs, reflecting their growing demand, average slightly higher at 28 basis points. The industry has seen a fierce price war to drive costs down, with economies of scale proving pivotal for success.

Italy’s ETF market stands out as the third largest in Europe, with a unique tilt toward fixed-income products, which make up 50% of the market - higher than in the UK, Germany, or Switzerland. Italian retail investors, however, remain underrepresented, largely because banks have little incentive to promote ETFs. But this could change dramatically, as retail penetration evolves, mirroring trends in other markets. For now, Italian investors are drawn to ETFs for their ability to balance capital protection with capital appreciation.

What’s fascinating is ETFs’ resilience, with consistent net inflows every year since 2008, even during market downturns. The growing interest in fixed-income ETFs is notable, as single corporate bonds have become expensive. In Italy, the first ETF was launched by UBS in 2013, and by 2024, its AUM reached €123.4 billion. UBS has been a trailblazer, with one-third of its ETFs focusing on sustainability - a trend it predicted and capitalized on early, setting itself apart from competitors. Sustainability resonates strongly in Europe, where regulations and consumer demand outpace those in the U.S.

ETFs are an investor’s great tool, offering index tracking, public trading (and therefore a high degree of liquidity), and unmatched flexibility across a vast array of asset classes. The numbers speak volumes: 91% of portfolio returns are driven by Asse Allocation, leaving security selection and market timing way behind. Even Warren Buffett, the ultimate value investor, endorses passive ETFs for their simplicity and efficiency. The ETF market is not just about innovation and growth: rather, it’s about accessibility and adapting to the evolving needs of investors. With continuous innovation, sustainability at the forefront, and increasing retail penetration, the Italian and European ETF markets are poised for an even brighter future.

Q&A session focused on the following: smart beta investing; overcollateralization; asset segregation; tracking error; price and yield spreads; synthetic and currency-Hedging ETFs.

Photogallery