Happy twelfth birthday ETFs

Happy twelfth birthday ETFs

A review of the exchange traded fund (ETF) industry in Europe seemed appropriate as April marked the twelfth anniversary of the first ETF in Europe. 

In April 2000 the first ETFs launched in Europe were the iShares DJ STOXX 50 listed on the Deutsche Börse on 11 April 2000, followed by the iShares FTSE 100 on the London Stock Exchange on 28 April 2000. The first two ETFs were originally branded as ‘LDRS’, sponsored by Merrill Lynch International and later acquired by iShares in September 2003.

At the end of Q1 2012, the European ETF industry had 1,281 ETFs, with 4,527 listings and assets of $301 billion, from 36 providers on 21 exchanges according to the ETF Global Insight Q1 2012 report. ETFs providing exposure to equity benchmarks have proved to be the most popular, accounting for two thirds of all assets invested in ETFs.   

Just over half of these assets have been used to implement exposure to European benchmarks.

Fixed income ETFs account for 19% of overall assets with products providing exposure to government benchmarks proving to be the most popular, accounting for nearly half. Commodity-focused ETFs comprise 11% of overall assets, with nearly 90% of that held in precious metals.   

In Europe, ETFs provide exposure to indices from 55 index providers. Stoxx has the largest number of ETF assets tracking its benchmarks, with $87.1 billion or 29% of assets, followed by MSCI with $68.8 billion at 23%, and FTSE with $21.7 billion comprising 7%.

Most ETFs in Europe are Ucits funds, and although these ETFs account for only 3.5% of the Ucits fund universe, they have been growing at a much faster rate than other Ucits funds with asset growth of 47% over the past 10 years for ETFs, versus 5% a year for other Ucits funds. Through the first quarter of 2012 assets in ETFs listed in Europe have increased 12%.  

Preference for physically backed ETFs

After the Lehman bankruptcy, the financial crisis, and due to potential regulatory changes, many investors have stated a preference for physically backed ETFs when they are available.

This is demonstrated by both the total assets and net new asset flows into synthetic ETFs, which have consistently lagged those of their physical counterparts.  

Investors through Q1 2012 were still putting more net new assets into physical ETFs in Europe. In Q1 2012 in Europe, physical ETFs received net new assets of $4.5 billion while synthetic ETFs received $609 million of net new assets.    

At the end of Q1 2012, 62% or $182 billion out of a total of $301 billion in European listed ETFs were in physical ETFs, while 63% of all of the products in Europe were synthetic.   

The top three ETF managers in Europe out of 36 account for 68% of all of the assets in Europe and the top 10 account for 92%.

It is arguably concern over counterparty exposure, both collateralised, uncollateralised and indeed poorly collateralised that started the focus on the risks in exchange traded exposures.

It is ironic that on the twelfth anniversary of the products that the debate and focus revolves around the already highly regulated funds sector, while the effectively unregulated non-funds exposure remain of concern but as yet lightly discussed.