After celebrating its tenth birthday in Europe last year, the ETF universe has continued to expand. Angele Spiteri Paris looks at recent trends.

ETFs may have taken flak over the years for swaps risk, stock lending, tracking error and a slew of other issues. But more than ten years down the line, the industry is still growing and proving the naysayers wrong.

Figures from BlackRock show that the global ETF industry reached $1,399.4bn (€970.9bn) in assets under management (AuM) at the end of Q1 2011, and the European space posted $307.5bn in AuM, an increase of $73bn from the same period in 2010.

BlackRock’s latest figures also suggest a change in the pattern of demand is taking place that could only spur more launches.

For example, funds with a broad European exposure saw outflows while those with single-country exposure saw inflows. Investor appetite for single-country products may well spill over into other asset classes, too, beyond European equities and into emerging markets. With this in mind, providers have been keen to offer more focused products.

Earlier this year, HSBC launched four physically-backed ETFs in Europe offering exposure to the Indonesian, Korean, Malaysian and Taiwanese equity markets. Farley Thomas, head of ETFs at HSBC, says: “Investors in Europe have, historically, had access to Indonesia and Malaysia through swap-based ETFs and there is generally a limited choice available for investors seeking access to these Asian markets.”

But Axel Lomholt, head of ETF product, iShares Emea, says: “Although we’ve seen some demand for more focused exposures and single-country funds have been quite successful, the majority of flows are still going into the broader- based ETFs.”

Constant demand
Not everything is changing. Appetite for commodities continues. Over the period between the Q1 2010 and the same time this year, commodities ETPs (exchange-traded products) in Europe posted $2.2bn of inflows, the BlackRock figures show.

It is hardly surprising then that product providers continue to launch vehicles with exposure to commodities. 

ETF Securities expanded its physically-backed industrial metals exchange-traded commodities (ETCs) and listed products offering exposure to aluminium, lead and zinc on the London Stock Exchange. These join the firm’s previous offering of copper, nickel and tin ETCs.

IShares also launched physically-backed commodity-based products, promising transparent and liquid exposure to four
popular precious metals: gold, silver, palladium and platinum. Joe Linhares, iShares head, says: “Commodity-related exchange-traded products are generating significant interest from investors.”

As product roll out has expanded dramatically over recent years, there has come a point where the industry became tainted by complexity.

Vin Bhatacharjee, head of Emea intermediary business at State Street Global Advisors, believes there will be demand in the European market for simple, uncomplicated products. “Although there are many plain vanilla ETFs out there, investors don’t have much choice, especially when it comes to physically-backed products,” he says.

SSGA, which has a significant ETF business in the United States, is currently building out its European presence in the market.

Dan Draper, global head of ETFs at Credit Suisse, agrees that simplicity is the way forward. “ETFs with less liquid underlying strategies
are attractive as there’s a marketing buzz around them. Economically, it may not be sustainable to come out with certain niche products.”

He says there is pressure to innovate because some claim there is a lot to gain from being first to market. And he probably feels this pressure more keenly than most,
since Credit Suisse was a relative latecomer to the ETF world. The firm has, however, succeeded in gathering US$15.6bn in ETF assets under management as at the end of 2010. This represents a 62% increase from the beginning of 2010.

Breaking into the market
But according to Thorsten Michalik, head of db x-trackers, innovation is key for a newcomer to break into the European ETF business. “If you come up with a new or an improved product, then you have the opportunity to grab some market share,” he says.

Michalik claims that investors get comfort from investing their money with a big name provider and, therefore, it is difficult for new players to break into the well-established vanilla products. Db x-trackers was at the forefront of some more alternative products, having been the first to launch a hedge fund ETF. But Michalik says it is now time to draw the line. “We’ve had lots of innovation, but now we have what we need.”

According to Lomholt, it is difficult to launch anything really new. “The categories – fixed income, emerging markets, commodities – are broadly the same. Although we are seeing some deepening and broadening of the ETF market, which is a positive thing.”

Thomas stresses that ETFs and their creation are driven by demand. “No one is looking for an ETF [per se]. What they’re looking for is market exposure and the most efficient way of achieving that,” he says.

©2011 funds europe



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