ETF market share 10% on London Stock Exchange

Exchange-traded funds (ETFs) have rapidly gained popularity in the United States with 30.7 percent share of market turnover in 2022. However, their growth in the United Kingdom has been comparatively slower, with an average traded value on the London Stock Exchange of 8.03 billion British pounds in September, which accounts for roughly 10 percent of total average daily turnover.

Key obstacles

Despite the appeal of passive, index-tracking investment strategies, ETFs in the United Kingdom have faced challenges that hinder their adoption. One key obstacle is the absence of tax advantages for ETFs in the United Kingdom. Additionally, concerns about pricing during times of market stress have deterred some investors. During the onset of COVID-19 pandemic in March 2020, certain corporate bond ETFs in the United Kingdom saw their prices fall significantly below their net asset value.

“One key obstacle is the absence of tax advantages for ETFs in the UK.”

Another fundamental reason for the delayed adoption of ETFs in the United Kingdom, is the continued dominance of traditional fund structures. Open-ended investment companies (OEICS) and unit trusts, which investors can purchase directly, are more prevalent in the United Kingdom. In contrast, ETFs only issue shares that only can be traded on the stock market. Some investment platforms charge dealing fees for ETFs, whereas many other funds have no such charges, making ETFs less attractive even if they come with lower annual fees.

Additionally, trading ETFs can be cumbersome, as some platforms struggle to efficiently handle ETF transactions. Fractional share trading of ETFs, which allows investors to buy smaller portions of an ETF, is often not offered. This forces investors to hold cash until they can afford a whole share.

‘ETFs in the UK are gradually gaining ground’

Despite these hurdles, ETFs are gradually gaining ground in the United Kingdom. Technological advancements and more streamlined ETF execution costs are expected to contribute to their growing market share. The legacy of the pandemic-era surge in trading may also work in favor of ETFs, as they offer faster liquidity compared to traditional funds.

More appealing to younger investors

ETFs seem to be more appealing to younger investors, particularly those interested in thematic portfolios, such as clean energy. Interactive Investor reported that investors between the ages of 25 and 44 had invested 29 percent of their total investments in ETFs.

‘This generational shift in investment preferences could lead to increased adoption of ETFs in the UK.’

Older investors were put 4.2 percent of their investments in ETFs. This generational shift in investment preferences could lead to increased adoption of ETFs in the UK.