Fund Management

Exchange Traded Funds Are On The March

Emma Rees, Features Editor, 12 May 2008

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The market for exchange traded funds has expanded rapidly, giving investors access to hitherto hard-to-access markets. In the first of two articles, WealthBriefing takes a look at how this market is evolving.

Exchange traded funds are transforming the investment landscape for high net worth investors and wealth managers. In existence in the US for fifteen years and launched nearly eight years ago in the UK, 2007 is often referred to as "Big Bang" for ETFs as a change in rules around stamp duty for foreign domiciled ETF providers in March 2007 prompted a surge of new providers to enter the market.

According to Lipper, the research firm, assets under management of ETFs traded on European exchanges grew by more than a third in 2007 to €93 billion ($148 billion) from €68 billion during 2007 and 141 new ETFs were launched, 57 of these by Deutsche Bank.

Exchanges in Germany had the highest market share (34 per cent) of the average monthly volume in 2007, followed by Euronext Paris (24 per cent), Borsa Italiana (12 per cent) and the LSE (10 per cent).

ETFs popularity in the first quarter of 2008 looks undiminished. A recent report in last week’s WealthBriefing, Morgan Stanley announced that trading volumes among the world's exchange traded funds surged by more than fifty per cent in the first quarter of the year as investors increasingly use ETFs to make bearish bets on global markets due to continued volatilty.

Average daily ETF turnover rose by 53.3 per cent in the first quarter compared to the end of 2007. At the end of the first quarter of this year, there were 1,280 ETFs globally with 2,165 listings together holding $760.8 billion of assets, a decline of 4.4 per cent on the previous quarter.

Lindsay Tomlinson, European vice chairman of Barclays Global Investors, the ETF market leader with 49 per cent of the market by assets with its iShares range, last week told the audience at WealthBriefing’s Breakfast Briefing, that he predicted assets of all types of ETF globally would rise to more than $2 trillion by 2011.

ETFs allow investors to buy a range of companies, through a single share. Normally designed to track the movements of an index, they are listed and traded like stocks. ETFs also have much lower costs than traditional funds.

Originally, ETFs tracked only the main benchmark indices. However, over time coverage has widened and underlying assets have become more specialised and niche, providing access to a growing choice of asset classes, industries, countries, regions, and strategies. The funds have also become more sophisticated and rather than just slavishly following a benchmark or existing index, increasingly providers of ETFs are tailoring the underlying indices to meet specific investment criteria.

Leading European providers include Barclays Global Investors iShares, db x-trackers (part of Deutsche Bank), Invesco PowerShares, Lyxor (a subsidiary of Societe Generale), SPA ETF and exchange traded commodities specialist ETF Securities.

BGI iShares
Following recent cross listings for its German domiciled iShares in Italy and France, global market leader Barclays Global Investors is also the largest ETF provider in Europe with 139 ETFs.

BGI has recently launched five new global and emerging market iShares including the first ETFs covering Israel, Thailand and Turkey. It has also listed the iShares JPMorgan $ Emerging Markets Bond Fund and the iShares S&P Emerging Markets Infrastructure fund in the UK in February this year and previously launched three Shari'ah compliant iShares and the iShares S&P Global Timber & Forestry based on the 25 leading global companies operating in this space.

Db x-trackers
Db x-trackers launched in January 2007 and has raised more than €10 billion of assets since, making it the third largest ETF provider in Europe by assets under management, with a market share of more than 10 per cent. There are currently 81 db x-tracker ETFs with 185 listings in Germany, UK, France, Italy and Switzerland. Its EONIA, € overnight money market interest rate tracker, has raised assets of €2 billion making it the largest fixed income ETF in Europe and according to db x-trackers the most successful ETF that has ever been issued on the continent.

Db x-trackers also recently listed the first three short Markit iTraxx ETFs on Deutsche Börse based on credit indices, which allow European clients to buy credit protection in an ETF format, via an exchange for the first time. It recently listed the first two Exchange Traded Funds linked to money market rates London Stock Exchange. These funds, the db x-trackers Sterling Money Market ETF and the db x-trackers US Dollar Money Market ETF, reflect the Sterling Overnight Index Average rate (SONIA) and the Fed Funds Effective Rate, representing respectively the British and American short-term money market reference interest rates.

Invesco PowerShares
Already a leading provider of ETFs in the US, Invesco launched its PowerShares ETFs in Europe in November 2007 with listings on the London Stock Exchange.

Invesco says its fund range is appropriate for wealth management groups because the constituents of its “fundamental-based” ETFs weight the constituents of their underlying indices according to their relative attractiveness in investment terms rather than by more traditional market capitalisation.

SPA ETF
Sister company of wealth management firm London and Capital, SPA ETF is another relative newcomer launching its range in September 2007 and also adopts an “intelligent” approach. The constituents of the indices underlying its Marketgrader ETFs are equally weighted and chosen from 5,700 equities listed on US equity exchanges using 24 measures which take into account growth, value, profitability and cash flow. Every quarter, a basket of stocks is selected that have the highest grading, based on certain rules around sector, diversification, market capitalisation and liquidity. Its ETFs track US equities seeking to outperform major US indices over the long term.

Lyxor
Lyxor ETFs are listed in Europe and Asia and reflect Equity, Bond and Commodity markets. The company is one of the leaders in the European ETF industry with more than €22.8 billion under management. It launched the first FTSE Allshare ETF and its range covers a number of countries including Japan, China, Russia and Brazil. Its most recent launches include ETFs investing in water and new energy and a range of four geographically focused funds covering Korea, Hong Kong, Turkey and Eastern Europe.

ETF Securities
ETF Securities, the main issuer of exchange traded commodities (ETCs) in Europe, launched in 2006. Previously only really available through futures contracts, ETCs provide access to commodities in a cost-effective and accessible way, through an index tracking vehicle listed on the stock market.

In addition to the ETCs which provide simple long exposure to commodities, ETF Securities recently listed 66 Short and Leveraged ETCs. Short ETCs enable investors to earn a positive return when the individual commodity or index they relate to fall. ETF Securities says that with the launch of its short and leveraged ETCs, it now offers platforms of physically backed precious metal ETCs and Classic, Forward, Short and Leveraged ETCs providing exposure to energy, agriculture, livestock, industrial metals and precious metals. Its ETCs have been listed on five major European stock exchanges in dedicated ETC trading segments.

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