The exchange-traded funds (ETFs) market in the UK, despite its success in the US, is experiencing slow growth due to the dominance of traditional structures like open-ended investment companies (Oeics) and unit trusts, lack of tax advantages, and pricing concerns during market stress, including the Covid pandemic. According to Lipper data, ETF trading only accounts for a mere 10% of market turnover in the UK.
Investment inefficiencies are being created as UK platforms often impose dealing charges on ETFs and lack fractional share trading. Industry expert Goncalo Machado from InvestEngine suggests that streamlined ETF execution costs could potentially boost their market share.
The rise of thematic portfolios such as clean energy and the growing interest from younger British investors could also favor ETFs, according to data from Interactive Investor. Even as Lynn Hutchinson from Charles Stanley and Peter Sleep from Seven Investment Management argue that ETFs are identical to traditional tracking funds, there's a noticeable trend toward converting mutual funds into ETF structures in the US.
This trend indicates an industry evolution that could potentially influence the UK market. However, platform inefficiencies remain a significant challenge for ETF growth in the UK. The future of ETFs in the UK will likely depend on how effectively these challenges can be addressed and whether the benefits of ETFs can be effectively communicated to both institutional and retail investors.
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