Naomi: Hi I'm Naomi Yamamoto, global program manager at State Street. Today I'm here with Ken Shaw, the head of EMEA ETF Solutions. Welcome, Ken. Thank you for being with us today.

Ken: Great to see you, Naomi.

Naomi: State Street has been driving innovation in the European ETF market for the best part of 25 years. As we look to the future, what are some of the innovations and trends you're seeing for both clients, investors and the industry as a whole?

Ken: Specifically, it's active and active is the momentum story in the market just now. So passive ETFs is the bedrock of ETFs and will continue to drive success. But investors are seeking out active strategies, looking for unique product offerings, access to target and performance, and looking to achieve specific outcomes. Managers are reacting to that, and looking to bring product to market, I suppose just to try and layer that momentum comment. We're seeing significant flows relative to the AUM of the active ETFs in the market. 2.5 percent AUM but 7 ½ percent flow, 25 percent new funds in active and we are seeing regulatory tail winds as well in that space.

Naomi: How is regulatory support evolving?

Ken: So, I'd say we're seeing regulatory clarity. I'd say we're seeing regulatory accommodation. And we're seeing the regulator engage constructively with the industry on market trends, either updating or bringing about new rules that are removing barriers to entry for issuers and investors alike.

I suppose I would give four, or call out four specific examples in that regard. So, in Luxembourg, the regulator has removed the subscription tax on active ETFs. In both Luxembourg, Ireland and France and others other markets as well they have removed the transparency requirements and brought in reduced portfolio transparency requirements. We're seeing a convergence around the naming conventions of products, around listed and unlisted share classes in particular, and the naming that goes along with that. And finally, we're seeing approval of esoteric products that we wouldn't have seen within the ETF landscape in the past.

Naomi: Thank you Ken. And what are we seeing from the investors’ perspective?

Ken: I'd say we're seeing the rise of retail. So if we look at some of the statistics we're seeing one approximately 1 in 5 European investors now hold an ETF significantly increased from 2 or 3 years ago.

And we've taken a bit of a leap of faith in our latest trends report and have suggested that that will extend to 1 in 4 retail investors by the end of this year. And I suppose there's a few drivers behind that. One is increased financial literacy across the European landscape, the rise of digital marketing, the increased, provision of ETFs within brokerage platforms.

I suppose the embedded features of an ETF, which are attractive to younger cohorts in terms of ease of access. They're a digital generation now. They want to be able to access their investment on their phone as they go. It's a low trading cost vehicle, it's a highly liquid product. All of those aspects are driving retail adoption.

Naomi: Ken, what are some of the challenges that our clients are facing today (both existing clients and prospective ETF issuers)? And how are we helping them to overcome those challenges?

Ken: So for existing issuers, I'd say their biggest challenge is looking to maintain or increase their market share, look to try and increase operational efficiency and ensure that their products remains proofed for future growth.
And so what they're looking for, for a service provider is a provider that has global reach, not just for ETFs and but for mutual funds as well, and ideally has global technology to support that. They're looking for best practice and expertise in region from those that have access to those that have ETF knowledge and have access to regulators, industry contacts, and can share those best practices with clients, and also have a technology budget that anticipates that future growth and delivers on that ahead of time.

And I suppose from a State Street perspective, we would say that we do all three of them. We would say that we have reach, we would say that we have technology and we would say that we have the expertise. So on the reach point, we service 42 percent of the ETF assets globally. And in Europe we service 46 percent of those assets.

From a technology point of view, we have a global proprietary technology that's used for both ETFs and non-ETFs. And from a technology roadmap perspective, we have a three-year roadmap that is looking to do just that, anticipate future growth and build for those future needs.

Naomi: Very impressive. And what about the entrance into the market for new prospects?

Ken: For new insurersissuers, I suspect that they're likely going to be challenged from a technology perspective. They will be new to the ETF landscape and they won't have the ETF integrations. And they also don't necessarily have the, or may not have the expertise from an ETF operations perspective, like a capital markets function or specific ETF sales. They're looking to service providers to provide them with support in that regard.

And again from a State Street perspective, I think we'd have two standout solutions for that. One's our Alpha for ETF solution, which involves CRD as a front office tool, creates a front-to-back solution for clients. And then on the operational support side of things, our colleagues in SSGA have a product set called ETF as a service, which looks to outsource a lot of the headaches, that an insurer might have coming to market and remove some of those operational and technology considerations that they might have and delegate that to SSGA.

Naomi: And is there anything unique for the active managers?

Ken: So as an active manager, they're looking to maintain their performance history, if you look at the survey results investors are saying, well, there's a couple things they want from an active manager.

They want product proliferation which doesn't really exist just now. They want performance history, which again, doesn't exist because the product capability isn't there. And the last thing that they're looking for is scale and again same reason, the product set isn't there. So the solution set for that is for an active manager to add ETF classes to their existing mutual funds.

Naomi: Ken, Luxembourg and Ireland has become the largest centers for ETFs in Europe? What do you think is driving this growth and is there room for expansion in the future?

Ken: I'd I say there's three reasons driving the growth on the industry side. And that's one is the support of regulatory environments in both jurisdictions. Second is a long-standing history of product innovation. And the third is the well-established ecosystem across all market participants. And why, I suppose, more market growth? It's the investor that's going to drive that, that market growth. So what I've just discussed is creating the levers to enable that. But on the investor side, you look at surveys, you look at various different facts in the marketplace.

And the market has doubled in the last five years. It's expected to double over the next five years. It's still only 10 percent of the broader European fund landscape, and investors have shown an appetite for ETFs. Over the last 2 or 3 years. They've had a significant outsized flow in ETF relative to other products. So I'd say all of that combined shows that we've got much to look forward to.

Naomi: And you see investors moving from traditional mutual funds to ETFs?

Ken: Absolutely. Most of the flows are coming from a mix of passive and active mutual funds into passive ETFs primarily, but a lot of that is because the product proliferation isn't there on the active side. So we expect to see significant change in that shortly.

Naomi: Thank you so much for being with us today Ken and sharing your insights into the European ETF markets. Especially as we celebrate this important 25th anniversary for ETFs.
Ken: Thank you for having me, Naomi.