Marking the 10th anniversary of Exchange Traded Funds (ETFs) in Europe, BlackRock’s Deborah Fuhr, Managing Director and Global Head of ETF Research and Implementation Strategy, today predicted an annual 30% rise in ETF AUM over the next few years, taking European ETF AUM to US$500 billion by 2012.
The compound annual growth rate for ETF assets was 90.5% in Europe over the past decade through year end 2009, which is significantly higher than the 58.1% in the US and 56.3% globally, demonstrating continued investor demand for ETFs.
On the anniversary of the first ETFs in Europe, which were first listed in April 2000 on the Deutsche Börse and London Stock Exchange, Ms Fuhr provided five predictions for the ETF industry:
1. ETF assets to rise by 30% in 2010
“With greater awareness of risk management, many investors have found that ETFs, which are structured as funds, meet their desire for greater transparency in relation to cost, investment holdings, liquidity, risk and return. By the end of 2012, we expect European ETF AUM will exceed US$500 billion and ETF assets in Europe to grow by 30% (this includes net new assets and market move) in 2010,” said Ms Fuhr.
2. Preference for core beta ETFs will continue
“Despite the growth in usage of ETFs covering alternative asset class exposures, investors’ preference will continue to be for ETFs based on broad-market indices which serve as core holdings. This is essential, especially in today’s environment of increased market volatility. Since no single sector, style, or stock consistently outperforms its peers, having core holdings invested in broad-market indices not only helps reduce volatility but also can achieve competitive returns for the overall portfolio,” said Ms Fuhr.
3. Significant growth across both institutional and retail investment markets
“ETFs have fundamentally changed the way both institutional and retail investors construct investment portfolios,” said Ms Fuhr. “We expect ETFs to continue to be one of the preferred investment vehicles for low cost beta exposure across both retail and institutional markets. Regulatory changes such as the Retail Distribution Review (RDR) seeking to ban commission in the UK retail market will have a significant impact on ETF usage in the next 18 months and we are seeing globally, the growth in institutional usage of European UCITS ETFs.”
4. Development and growth of investment styles that employ products like ETFs, will be used as building blocks for delivering low cost beta
“Product ranges are beginning to emerge in more specialized areas to cater for the growing number of professional and retail investors who want the advantages of ETFs but in a managed investment solution such as a funds of ETFs solution,” said Ms Fuhr.
5. The risk of confusion, disappointment and disillusionment among investors would be very negative for the ETF industry
“We are at an important crossroads in the ETF industry. We are seeing funds calling themselves ETFs which 1) do not provide transparency on their underlying portfolios, 2) do not offer in-kind creation/redemption and 3) do not have real time indicative Net Asset Values. Products which are not even funds are being called ETFs. Now that the industry accounts for over US$1 trillion, product developers are working hard to find ways to put structured products, hedge funds and active funds into an ETF wrapper without maintaining the above basic features of an ETF. If this is allowed to continue we risk confusion, disappointment and disillusionment among investors which would be very negative for the ETF industry,” said Ms Fuhr.
Ms Fuhr said that greater transparency around product structure, index replication methodology and pricing would prove vital to helping investors make informed investment decisions when considering ETFs.
“ETFs are one of the greatest financial innovations of the last decade in Europe and we expect a bright future but the industry is at a critical crossroads,” said Ms Fuhr. “Clarity is critical if the industry is to help investors understand the structure, mechanics, tax and regulatory implications of using ETFs. Agreeing definitions for the various product structures is one of the pressing needs of the industry in 2010.”
10 years of ETFs in Europe: A statistical update
• The first European ETFs were the iShares DJ STOXX 50 (EUN1 GY) and iShares DJ Euro STOXX 50 (EUN2 GY) listed on April 11th 2000 on Deutsche Börse, followed by the iShares FTSE100 (ISF LN) on the London Stock Exchange extraMARK segment on April 28th 2000.
• Over the past decade through year end 2009 the compound growth rate for ETF assets was:
o 56.3% globally
o 90.5% in Europe
• At the end of January 2010 the European ETF industry had:
o 896 ETFs
o 2,468 listings
o US$217.9bn AUM from 34 providers on 18 exchanges
• YTD assets have decreased by 4.0% which is less than the 5.9% fall in the MSCI Europe Index in US dollar terms.
• YTD the number of ETFs increased by 8.1% with 67 new ETFs launched.
• iShares is the largest provider of ETFs in Europe in terms of both number of products, 172, and AUM of US$82.5 billion, reflecting 37.9% market share.
• Lyxor Asset Management is second with 127 products and US$43.8 billion, a 20.1% market share.
• db x-trackers is third with 118 products and AUM of US$35.8 billion, a 16.4% market share.
