The European ETF industry turns 25 this year, marking a quarter-century since the first ETFs were listed on Deutsche Börse in April 2000. From those early days – featuring just two index-tracking funds – the market has grown to over 3,000 products across 29 exchanges, with $2.4 trillion in assets.
ETFs have played a key role in lowering the cost of investing. In 2023, the average fee for a European equity ETF was just 0.35%, and even lower – around 0.22% – for bond ETFs. That’s a modest cost for broad market exposure, and over time, lower fees can make a meaningful difference to long-term returns. Expanding access to diversified, low-cost investment tools has been one of the most significant developments in modern investing.
That said, like all financial instruments, ETFs involve a degree of risk. Their performance may be affected by market volatility, tracking error, and – in some cases – reduced liquidity during periods of stress. While ETFs are generally considered liquid, extreme market conditions can lead to wider bid-ask spreads or pricing deviations, as seen in March 2020.
Still, ETFs have reshaped the way we invest. Here’s how – 25 ways they’ve changed the investment landscape, helping make markets more accessible, efficient and transparent for a wide range of investors.
- Changing the game on fees
ETFs haven’t just lowered their own costs – they’ve pressured the whole industry to do the same. In the US, average fund fees have fallen from 0.87% in 2004 to 0.36% in 2023. In Europe, too, fund charges have dropped steadily, helped by the rise of ETFs. The message is clear transparency and competition work.
- Diversification, made simple
One ETF can give you exposure to hundreds – or even thousands – of companies in a single trade. Take the MSCI World ETF, for example it holds around 1,400 stocks and covers more than 85% of global market cap. Building that kind of portfolio on your own? Nearly impossible. Broad diversification helps reduce risk and smooth returns over time – exactly what most investors need.
- A new level of transparency
ETFs are refreshingly transparent. Most of them publish their full list of holdings every day – unlike traditional mutual funds, which might only report monthly or quarterly. This means investors always know exactly what they own. And because ETFs typically track indexes, there’s less guesswork or discretion involved, making the investment process more predictable and easier to understand.
- Raising the bar for the industry
ETFs have also pushed the broader financial industry to be better. Their simple fee structures and real-time pricing have made opaque or overly complex practices less acceptable. In fact, the ability to trade ETFs throughout the day has helped reduce pricing manipulation and brought more fairness and efficiency to markets. Traditional fund managers have had to adapt, and that’s been a win for investors.
- More flexibility, better control
Unlike traditional funds that can only be bought or sold at the end of the day, ETFs trade just like stocks – throughout the trading session. That gives investors and portfolio managers more flexibility to act quickly, manage cash flows precisely, or make tactical shifts when needed. It’s diversification with real-time control.
7. Liquidity – even in tough markets
ETFs are generally considered liquid, as they trade on stock exchanges throughout the day like regular shares. This intraday trading feature can provide flexibility for investors, even in periods of heightened market volatility. During the COVID-19 market shock in March 2020, ETF markets continued to operate, offering a way to transact when underlying bond markets were under pressure. However, it’s worth noting that some ETFs did trade at significant discounts to their net asset values during that time, highlighting that liquidity and pricing can vary depending on market conditions.
8. Easy access to sectors
Want exposure to tech, healthcare, or energy? Sector ETFs make it simple. Before they came along, investing in a specific industry meant picking individual stocks or paying high fees for niche mutual funds. Sector ETFs offer a cheaper, more convenient way to target parts of the economy.
9. Making factor investing mainstream
Factor investing was once the domain of institutional quants – large, data-driven investors like hedge funds or pension funds that rely on complex mathematical models and huge datasets to build their portfolios. This strategy involves targeting specific drivers of return, known as factors, such as value (buying undervalued stocks), momentum (buying stocks that have been rising), quality (investing in companies with strong fundamentals), or low volatility (focusing on more stable stocks). Factor investing is now accessible to everyone thanks to “smart beta” ETFs. These funds let you target specific factors using rules-based approaches. They sit somewhere between passive and active investing, giving you more ways to fine-tune your portfolio.
10. Opening up commodities
ETFs have made it easy to invest in commodities like gold, oil, or agriculture. Before, it was complex – requiring futures contracts or physical ownership. Today, commodity ETFs offer a simple, liquid, and low-cost way for regular investors to add this asset class to their portfolios.
11. Managing currency risk
Multi-currency portfolios can be tricky, especially when exchange rates move against you. Currency-hedged ETFs help manage that risk, allowing you to focus on market returns without added volatility caused by fluctuations in exchange rates.
12. Bringing transparency to bond markets
Bond markets have long been opaque, especially for individual investors. Bond ETFs changed that. They trade on exchanges, just like equity ETFs, with live pricing and daily disclosure of holdings. That makes fixed income investing far more accessible and transparent than before.
13. Boosting bond market liquidity
Bond ETFs don’t just improve access – they enhance market liquidity. Their secondary market acts as a buffer when underlying bonds are hard to trade. In early 2020, when the cash bond market seized up, bond ETFs continued to function, helping investors transfer risk and discover prices in real time.
14. Targeting niche bond segments
Bond ETFs also offer precision. Want exposure to short-duration bonds, high yield, or emerging market debt? There’s likely an ETF for that. This level of granularity means investors can tailor fixed income portfolios with far more control than ever before.
15. Powering thematic investing
From AI and cybersecurity to ageing populations and clean energy, ETFs have made it easy to invest in big-picture themes. While thematic mutual funds existed before, ETFs brought lower costs, daily liquidity, and simpler access – fuelling massive growth in this space.
16. Improving price discovery
ETFs have helped make markets more efficient. Because they trade throughout the day and reflect the value of their underlying assets, they play a key role in price discovery – especially in less liquid markets. Some studies even suggest they reduce pricing errors and dampen volatility through improved transparency.
17. Redefining portfolio construction
ETFs are now the building blocks of modern portfolios. With their low costs, broad range, and high liquidity, they’ve made it easier for investors to adopt strategies like passive investing, global diversification, sector rotation, or the core-satellite approach – all once reserved for institutional investors.
18. Generating extra returns through securities lending
Many ETF providers lend out the securities held in their funds to earn additional income. This revenue can be used to offset fund costs or enhance performance. In some cases, even ETF shares themselves can be lent, supporting short strategies or market liquidity. It’s another way ETFs help improve efficiency and lower costs.
19. Investing, even with small amounts
ETFs have lowered the barriers to entry for investors with limited capital. With just a few pounds, anyone can build a globally diversified portfolio – something that was once only available to high-net-worth individuals.
20. Access to emerging markets
Emerging markets like China, India, or Brazil used to be hard to reach, even for professionals. ETFs changed that. They offer diversified, liquid, and low-cost access to some of the world’s fastest-growing economies – bringing new opportunities to everyday investors.
21. Helping close the gender wealth gap
ETFs are empowering more women to invest and take control of their finances. Initiatives like Women in ETFs, launched in 2014, continue to promote inclusion in the industry. While the gap remains, ETFs have opened new doors toward greater financial equality.
22. Bringing private markets closer
ETFs are starting to break into the world of private markets – once considered off-limits to retail investors. New, innovative products are opening exposure to private credit and equity. It’s still early days, but this could become a major trend as investors seek more diversification and new return sources.
23. Supporting financial education
By being transparent and easy to understand, ETFs have helped more people learn how investing works. They encourage awareness of key concepts like diversification, risk, and asset allocation. In short, they’ve made more investors feel confident managing their own money.
24. Making ESG investing more accessible
ETFs have played a major role in the rise of ESG investing. A wide variety of ESG-focused funds now allow investors to align their portfolios with their values – whether that means prioritising climate, governance, or social impact. What was once niche is now mainstream, thanks in large part to ETFs.
25. Enabling the growth of digital investment platforms
The rise of robo-advisors and digital wealth managers like Moneyfarm has been made possible in large part by ETFs. Their transparency, simplicity, and low cost are a perfect match for tech-driven platforms looking to offer smart investment solutions at scale. ETFs are the engine behind many of these modern services.
This is a financial promotion by Moneyfarm and is not independent advice. This is not personal advice. If you are unsure whether an investment is right for you, seek independent financial advice.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
