New York – An article in today’s European Ignites report covers the growth of Exchange Traded Funds (ETFs) in Europe. The article stands as a testament to ETF trends globally, their growing uses and usage. ETFs follow a number of index products, such as overall indexes, sector indexes and even REITS and fixed income products.
ETFs generally compete with mutual funds for investment dollars. The advantages of ETFs are often viewed as tax efficiency and lower annual expenses. Typically, ETFs have expenses of between 0.1% and 0.65%, while mutual funds have expenses anywhere from 0.1% to 3.0%. One of the key differences is the oversight of mutual funds and the trading of underlying securities is rigorously managed, leading to greater transactions costs and asset turnover. Because of this, ETFs often have greater tracking error than do competitive mutual funds. Even so, the ETF market is highly accessible in terms of low initial investment requirements.
EFT growth has been boosted, both by inherent advantages, such as tax efficiency, but also by the trend toward greater risk aversion in recent months. For those that wish to have equity positions, ETFs are a cheap way of diversifying their portfolios. In light of the movement away from riskier products, physical ETFs are expected to grow more quickly than their swap-based brethren. This is because swap-based ETFs add an additional layer of counterparty risk-a risk that has hand-cuffed the credit markets recently.
ETFs allow investors to development strategies. Some of the simplest strategies are the use of dollar cost averaging, Sector rotation techniques and overall asset allocation. Some investors use ETFs to delta other positions in their portfolio, or as part of a risk management strategy.
The aforementioned article indicates that the European ETF market is $145 billion (up 13%) as of the end of September. This is compared to the $542 billion (-6.6%) of ETFs in the US market. Particularly in Europe, there is a need for more third party ETF research to promote the growth of the ETF market. A Swiss Exchange Newsletter on European ETFs explains in greater detail ETF product available on that exchange.
Integrity Research Associates is a research consultancy that finds research for our buy-side clients. We are currently looking to expand our ETF research capabilities. We invite ETF research providers to write contact us directly. Please contact either Ashley Burrell – Ashley.Burrell@integrity-research.com or Tom Hutchinson – Thomas.Hutchinson@integrity-research.com.