Citigroup unveils plan to power active ETF surge in Europe

Citigroup is launching a European exchange traded fund platform to help third-party managers enter the rapidly growing sector.

The move by the third-largest US bank to create a “white label” platform threatens to shake-up a sector dominated by smaller specialist players, even after Goldman Sachs became the first big-name entrant to the platform sector when it launched its ETF Accelerator last year.

Citi Velocity ETFs will launch in the first quarter of 2025 with the aim of helping active asset managers enter the European ETF market, where actively managed funds are starting to make headway in an industry previously dominated by passive index-tracking vehicles.

“There is almost universal agreement that the mutual fund wrapper is in terminal decline and as a consequence there are a huge number of firms scrambling to think ‘What does that mean for us? How do we create an ETF solution?’” said Andrew Jamieson, global head of ETF product at Citi.

The small but growing European market for actively managed ETFs has trailed the more rapid expansion witnessed in the US, where active funds attract $3 of every $10 of new money invested in ETFs.

Active ETFs accounted for 8.4 per cent of net inflows to European-listed ETFs in the third quarter, according to Morningstar, well ahead of their 2.2 per cent share of assets. Their combined assets topped $50bn for the first time, having doubled in the past 18 months.

Smaller ETF issuers often enter the market with the help of a white-label platform, which provides many of the support functions, from capital market support to compliance.

Platform providers such as Tidal Financial Group, Exchange Traded Concepts and Alpha Architect service hundreds of ETFs in the US. HANetf is the market leader in Europe with 34 funds, but a number of other platforms have struggled to reach critical mass.

Citi is hoping to upend this model by expanding white-labelling to “the world’s largest and most sophisticated institutional asset managers”. It said it had discussions with more than 40 asset managers — a combination of European mutual fund managers that have yet to launch ETFs and US houses that have ETFs in North America but not yet in Europe, including some “big heavyweight managers”.

“Europe is the hotbed of opportunity currently,” Jamieson said. “We have seen the explosion of active products in the US. We have seen a big uptick of retail [investment] in the US. We think that will happen in Europe.

Moreover, Europe is in a “sweet spot” because investors in many other parts of the world, including Latin America, Asia and the Middle East, increasingly want ETFs sporting Europe’s Ucits wrapper, Jamieson argued.

More than 260 fund groups offer ETFs in the US but just 60 in Europe, according to Bloomberg data.

Jamieson believed the gulf was caused, in part, by many US issuers being wary of entering the more complex European market, with its multiplicity of markets, regulators, exchanges, languages, taxes, currencies and distribution rules.

The most recent US entrant, Janus Henderson, went to the extent of buying a smaller European issuer, Tabula Investment Management, to expedite its entry into the market. Cathie Wood’s Ark Invest took the same path last year when it bought Rize ETF.

Jamieson believed many US ETF issuers that did not want to go down the acquisition route had held back from entering Europe.

“They have a lack of expertise and a lack of resources [in Europe]. They don’t know how long it’s going to take and they certainly don’t know how much it’s going to cost them,” he said.

Citi’s platform will differ from existing white-labellers in providing a wider range of services, given that the bank is already an authorised participant, market maker, swap counterparty, depositary, custodian, paying agent and transfer agent for ETFs.

“The one remaining gap was the ability to launch products for other people. We see this as the final part of the puzzle,” Jamieson said. “It’s a one-stop shop”, providing economies of scale and reducing the product launch timeline from one or two years to three to six months, Citi said. It declined to be drawn on the pricing structure for the platform.

“Citi Velocity ETFs enables asset managers to focus on their core responsibilities: product idea generation, portfolio management and distribution. We feel we have got a better mousetrap, a better solution,” added Jamieson, who said Citi had been working on the project for two years.

Deborah Fuhr, chief executive of ETFGI, a consultancy, welcomed the launch and saw potential for growth.

Among US ETF issuers, “everyone is contemplating whether they should launch Ucits ETFs”, Fuhr said, pointing out that US-domiciled ETFs are not tax-efficient for non-US investors. “[They are thinking about] how they should come to Europe as a gateway to the world. Ucits ETFs travel better.”

However, she said asset managers needed to factor in the cost of using a platform and the portability of their ETFs if they ever decided to bring them in-house.

Fuhr added that a platform such as Citi’s did not help with distribution, which was “one of the biggest challenges” for ETF issuers.

Jamieson was hopeful these obstacles could be overcome. “The number of active ETF issuers in Europe is set to double or triple, as Europe catches up with the US.”