The promise of a bright future

le 14/06/2013 L'AGEFI Hebdo

Innovation, investor interest, etc., exchange-traded funds now have assets of more than 2,000 billion dollars.

On 29 January last, State Street celebrated the twentieth anniversary of its S&P 500 ETF, which had marked the birth of the exchange-traded fund industry. Launched with just 6.5 million dollars in assets, this ETF now has 123 billion dollars of assets under management. This exceptional growth mirrors that of the industry as a whole. According to data compiled by ETFGI, a specialised consulting firm, the 10-year growth rate at the end of 2012 was 30%, with 4,731 funds and 208 promoters worldwide. This growth has gathered pace over the last four years and ETF assets have doubled to more than 2,000 billion dollars. According to BlackRock, the ETP (exchange-traded products) sector, which includes not only ETFs but also ETC/ETNs (exchange-traded commodities/notes), passed this symbolic threshold in January this year, with 2,045 billion of assets under management (see graph), thereby continuing the dynamic growth recorded in 2012. “Last year, ETPs as a whole gathered record inflows of 263 billion dollars, notes David Benmussa, Director in France of iShares, the ETF platform managed by BlackRock, the US giant. A large part of these inflows into equities would appear to be generated by investors switching from active management to passive management.” ETF assets alone have increased by 30%, to 1,755 billion, according to Deutsche Bank analysts.

2% of assets under management

However, ETFs represent only 2% of the asset management industry as a whole. According to players in the sector, this merely emphasises the sector’s future growth potential. “Assets under management could double again, or grow even more rapidly, over the next four years”, according to David Benmussa. “We forecast 15% asset growth this year”, specifies Arnaud Llinas, Head of ETFs at Lyxor, the Société Générale subsidiary. Other than the potential created by the relative size of ETPs in the world of asset management, the sector will continue to be driven by product innovation, in particular in the fixed income segment. “Historically, the ETP market has been dominated by equity indices, notes Arnaud Llinas. The fixed income theme is more recent, but has developed strongly over the last four years.” This segment recorded particularly strong growth in 2012 with inflows of 70 billion.

Above all, these innovations have been developed in response to growing investor interest. “Investors are increasingly using ETPs within the framework of their tactical and strategic allocation”, notes Deborah Fuhr, a partner at ETFGI. This appeal is justified by the flexibility offered by these products, according to specialists in the sector. “ETPs facilitate access to certain markets and are easier to use than futures, emphasises Houda Ennebati, Product Specialist Passive France at db-X Trackers (Deutsche Bank). That is the case in the high yield fixed income segment and for ETFs invested in equities of certain countries such as India.”

However, in an increasingly heterogeneous universe, with a significant number of replicated indices, with even several promoters marketing ETFs using the same benchmarks, investors are paying particularly close attention to the characteristics of the various products. “They are looking at not only the fund’s performance versus the index, but also the quality of replication, the spread and liquidity”, explains Arnaud Llinas at Lyxor which has recently published a survey on gaps in performance between ETFs replicating the same index. It would appear therefore that cost is not the most important criterion for investors, especially as investors have to take account of not only management fees, but also a whole series of parameters, such as security lending-borrowing, tax optimisation of dividends, etc., in order to calculate the total cost of holding an ETF. Investors prefer therefore to concentrate on the liquidity of these products, which explains why the largest funds attract a substantial proportion of inflows. “It is a market where size is extremely important”, emphasises David Benmussa. As a result, the market is dominated by three players, both in Europe and the United States. On the other side of the Atlantic, iShares, State Street and Vanguard account for the lion’s share of the market with a total market share of 83.1%. It is the same story in Europe where iShares, once again, db-X Trackers and Lyxor are the dominant players with a market share of 53.3%. Moreover, iShares is likely to bolster its dominance even further with the acquisition of Credit Suisse ETF… and cause widespread gnashing of teeth among its rivals and certain investors.

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