ETFs: golden opportunity

Among the vast array of ETFs available, gold has been one of the best performers in a flourishing market, writes Angele Spiteri Paris

Gold mining shares gave the exchange-traded fund (ETF) market its best-performing equity product in the first half of 2010. The fund, offered by ETF Securities, rallied 14% while the FTSE 100 fell 14% and the EuroSTOXX 50 Index fell 20%.

ETF Securities, which offers the ETFX DAXGlobal Gold fund, said: “A perfect storm of a rising gold price and a strengthening US dollar in 2010 has had a strongly positive effect on gold mining company margins and share performance.”

The fund tracks a diversified index that comprises the performance of 20 of the world’s major gold mining companies.

As for the actual commodities themselves, precious metals have proved to be a good ETF investment so far this year. Lipper, a data provider, found precious metals to be the best performing group of commodities, and it was a Credit Suisse fund with the catchy title of CS ETF II (CH) on Gold that came out on top in terms of investment performance with a 33.76% return in the first half of the year.

Credit Suisse said in a recent newsletter: “This precious metal is particularly well suited to diversifying portfolio risks, especially those of US dollar investments; it offers a good hedge against marginal risks; and it makes a significant contribution to performance in an environment characterised by rising inflation, risk aversion, high interest rates and a falling US dollar.”

The Credit Suisse gold ETFs invest in physical gold without using derivatives, giving investors access to the performance of gold on the spot market.

Not all Pigs are equal
The ten bottom-performing funds were based on new energies and two of the so-called Pigs countries, Spain and Greece (the others being Portugal and Ireland), which have all had severe economic difficulties. The Lyxor ETF MSCI Greece was the worst performing equity ETF, according to Lipper.

Morningstar ETF analyst Patricia Oey warns of the dangers of single-country products. She says in a report: “Single-country funds can be a source of portfolio diversification by providing exposure to markets with different growth trends and foreign currencies. However, it is important to note that some single-country funds can have very heavy weightings in certain sectors or individual stocks.” Furthermore, investors in such funds need to keep up with the macroeconomic environment of many countries, which is what they should have done in the case of Greece.

The Lipper analysis of individual asset classes shows that equity and money market ETFs decreased in AuM over the first half of the year, while all other asset classes enjoyed increasing AuM.
Of the 615 equity ETFs analysed by Lipper, 38.5% showed negative performance over the second quarter, which was in line with the equity markets they track. A half-year report from ETF Securities says: “After getting off to a strong start in Q1 2010, the sovereign debt crisis in Europe caused a sharp drop in global equity markets in Q2, with the more growth-sensitive equity ETFs seeing some of the sharpest falls.”

According to Lipper, the equity products focused on emerging markets remained the most popular and the best performing, as in previous quarters.
However, in July equity ETFs began to see more inflows. The BlackRock data shows that equities gathered $1.3bn (€0.84bn) net inflows over the month, of which $0.6bn went to emerging markets equities and $0.4bn to global equities.

Fund flows
The commodity story not surprisingly attracted the most significant fund flows. Over the year to the end of July, commodity ETFs saw inflows of $5.8bn, of which $4.4bn went to precious metals and $0.6bn to broad commodity exposure, according to BlackRock, the fund manager that owns iShares, an ETF provider.

iShares, which is the largest ETF provider, in fact suffered slightly from, in part, the commodity theme in the second quarter of this year when it’s ETF assets fell 0.34%. According to Lipper, this development was driven by growth in commodity- and real estate-linked equity products, which saw fund flows increase by 0.85% to €0.30bn, and 9.56% to €1.41bn respectively. Lipper notes: “iShares has the highest AuM [assets under management], but it does not offer the largest variety of ETFs on the pan-European exchanges.”

In the same period, bond funds increased assets by 13.50% to €17.32bn. On the other hand equity funds decreased -5.32% to €41.85bn, and money market funds fell -5.31% to €0.80bn, according to Lipper.

Each of the three largest providers of ETFs saw assets decrease in the second quarter of this year, though broadly the appetite for these products has not waned. At the end of July, the global ETF industry had 2,282 ETF products in its armoury with US$1,095.2bn of AuM. There were 4,872 listings on 42 exchanges around the world and 124 providers in the market.

According to Lipper, pan-European ETFs gained 1.79% in assets in the second quarter of the year, reaching €183.24bn. The firm says this was a “surprising inflow considering the movements on the global stock markets”.

Data from BlackRock shows that until July this year, European ETF assets increased assets by 4.2% from $226.9bn to $236.3bn.

Market share
Data from BlackRock shows that at the end of July 2010 iShares was the largest ETF provider in terms of both number of products, with 173 ETFs, and assets, having $85.4bn in AuM. The firm has a 36.1% market share.

Lyxor Asset Management is the second largest provider of these funds with 19.1% market share. BlackRock research shows that the firm has 125 products and $45.1bn in AuM.

Lipper finds that the AuM at Lyxor decreased 1.57% during the second quarter of the year. The increases in commodity-linked products, bond funds, money market funds and other products were offset by decreases in the firm’s equity funds and equity-linked real estate funds.

In third place was db x-trackers with 135 ETFs, AuM of $38.4bn and 16.3% market share, says BlackRock. According to Lipper, db x-trackers offers the broadest variety of investable indices and strategies to its clients.

The Deutsche Bank ETF business also saw a decrease in AuM over the second quarter, however at 0.04% it was considerably lower than the declines seen by the other top providers. In contrast to Lyxor, db x-trackers saw an increase of €0.08bn in its equity-linked real estate funds. However, the firm saw decreases in its money market funds, equity funds and its commodity products.

New listings
Lipper found that db x-trackers launched the highest number of new funds, having listed 48 funds during the first half of the year. While HSBC, a new entrant to the market, was one of the providers launching the fewest products, having brought three ETFs to market during this period.

In aggregate, it was the Swiss players that launched the most new funds, meaning Lipper found Switzerland to have been the preferred domicile for new funds traded on the European exchanges, followed by Luxembourg and France.
Julius Baer, CS ETF (formerly known as XMTCH), UBS, and ZKB were the Swiss providers with the majority of new fund launches – 24, 13, 8 and 4 respectively. Furthermore, since the domicile of a fund is often the same as the domicile of the promoter or the existing fund family, Lipper says it is also not surprising that Lyxor, Easy ETF and Amundi (formerly known as Casam) domiciled all of their new funds in France, within their existing fund families there.

©2010 funds europe



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