It’s great to own securities in America.
If you are wise, you buy an exchange-traded fund (or mutual fund) and you own through the ETF provider a basket of stock or bonds, at a low fee. You own a slice of the packet, the exchange traded fund or ETF, and the ETF provider owns the underlying securities. You are American, the ETF provider is American, the company can be anywhere in the world.
Let me explain what these terms mean first. Stock or shares represent fractional ownership of a company. For example, ENI (the Italian oil & gas company) has 3630 million shares outstanding. That means that each of them stands for 1/3630 000 000 of the company, and “has a claim” on that proportion of company profits.
Technically, to have control of a company, one needs to have more than 50% of stock, but things can get complicated. Different votes may require different proportions of stockholders to pass or fail. An ETF holds a basket of stock. Its aim is to hold them in the same proportion as an index. This index could be the American S&P 500, the French CAC 40 or the German DAX 30, for example. There are other possible permutations but they are beyond the scope of this article. An ETF however, is owned by a company, which charges a fee for this service.
The problem is voting rights
The problem arises if you are European. The issue we face in Europe is that of the voting rights. Each stock comes with voting rights in the proportion of ownership of the company and important decisions can be taken in stockholder general meetings. When you own an ETF, you own the wrapper, but the voting rights of the stock rest with the ETF provider, who owns the stock. This means that they can potentially have a significant influence in votes relating to the companies they hold. Currently, it’s a potential risk, but it is a risk that is set to grow, as we will discuss later.
The potential problem for us in Europe is that the largest ETF provider companies are American. The idea of an index mutual fund, and then of an index ETF, was first developed in America by Jack Bogle, who founded Vanguard. He started his first fund, named First Index Investment Trust and nicknamed “Bogle’s Folly” in 1976. Ultimately, this financial innovation has continued to expand around the world. Currently in Europe, about 15% of savings invested in securities are in ETFs and it is projected to reach 22% in 2025: “In its base-case scenario, Moody’s expects the wider passive fund sector, including tracker funds, to grow to 22% of total AUM by 2025, up from 14% at year end-2017.”
And who holds them
Therefore, although the savings invested in those securities are possessions of Europeans, the voting rights from the ETFs accrue to Americans. Currently, that has not been a problem. The Big Three ETF money managers are all American companies: BlackRock, Vanguard and State Street. BlackRock has 1459000 million $, or 1.45 trillion $, as assets under management. The European ETF market (ie the ETFs offered to Europeans) is dominated by BlackRock.
The biggest European ETF provider (Deutsche Bank) is 16th on the list globally, and 2nd in Europe. Currently, ETF providers have a clearly stated policy on their sites on how to manage votes on mergers and acquisitions. But nothing guarantees us that it won’t change. It is not unreasonable to think that an American company would look out for American interests.
In future fights for mergers and acquisitions for European companies, the votes of American ETF providers, managing European savings, may be important. Given that many European companies do not attain the necessary scale to compete in the global market, that may prove to be a problem in the future. In the wake of the Commission’s decision to not assent to a merger between Alstom and Siemens, this becomes even more worrying. Alstom may then be subject to a takeover offer by a foreign company. Who knows whether an American ETF provider will have the deciding vote on that offer?
[As a side-note, this is not to say that ETF providers from another country eg China, would present a lesser or greater risk. It’s just that the current ETF market is dominated by American companies, so the article had to by necessity refer to them. It’s generalisable to all foreign-owned ETF providers.]
Photo credit: Markos Loizou
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