Are you backing the most traded ETFs?
One of the major challenges for investors in the European exchange traded fund (ETF) market is being able to find out how much a product is traded.
Being able to see how much is traded in ETFs, both on exchange and off exchange, helps increase transparency around pricing, which in turn has a positive impact on secondary market spreads.
As a result, this will encourage more transactions being effected on exchange. But as it stands, only around 30% of all ETF trades in Europe are reported.
An important point for investors to understand is that under the Markets in Financial Instruments Directive (MiFID), ETF trades in Europe do not currently have to be reported. This means investors cannot accurately measure the total volume of shares traded in any ETF on any day.
Another challenge in calculating the volume traded in ETFs listed in Europe is that they are listed and cross listed on 21 exchanges in Europe without a consolidated tape to aggregate all trades across the various exchanges.
However, under the second instalment of MiFID, which is on the horizon, it is likely that ETF trades will have to be reported in Europe and there will be a consolidated tape combining the trades that happen on the 21 exchanges in Europe.
Although the London Stock Exchange and Swiss Stock Exchange currently require all trades of ETFs to be reported, other exchanges across Europe do not require this.
As a result, around 70% of the ETF trades are over the counter (OTC) and not reported, so those volumes that you do see only represent the tip of the iceberg.
Based on the ETFGI end of April 2012 report, the European ETF industry had 1,295 ETFs, with 4,579 listings, assets of $291 billion, from 37 providers on 21 exchanges.
In our analysis for the month of April 2012, we found that 88 brokers reported 46,521 trades totalling $47,904 million volume in European listed ETFs/ETPs.
Deutsche Bank reported the largest volumes with $5,856 million in trades, followed by Société Générale with $5,140 million.
The top 20 brokers, by reported volumes, account for 92.8% of advertised trades while 68 other brokers collectively account for the remaining 7.2%.
Many investors ask which brokers are the most active in trading ETFs listed in Europe. Large global brokers who are highly ranked in portfolio trading – trading large baskets of stocks for clients – as well as firms highly ranked in trading the full spectrum of delta one products tend to be the most active traders of ETFs in Europe.
One of the major benefits of ETFs is the real-time pricing and intraday liquidity and trading they offer compared with traditional mutual funds, which are only priced once a day.
Investors have the ability to invest in ETFs at any time during the trading day, just like normal shares, which is a significant benefit over mutual funds, especially in volatile environments when markets can experience significant movements intraday.