With an exceptional growth projection of an annual 30% rise in European Exchange Traded Funds (ETF) assets under management will be $500 billion by 2012.
BlackRock’s Deborah Fuhr, Managing Director and Global Head of ETF Research and Implementation Strategy said that the compound annual growth rate for ETF assets was 90.5% in Europe over the past decade through year end 2009, which is significantly higher than the 58.1% in the US and 56.3% globally, demonstrating continued investor demand for ETFs.
“With greater awareness of risk management, many investors have found that ETFs, which are structured as funds, meet their desire for greater transparency in relation to cost, investment holdings, liquidity, risk and return. By the end of 2012, we expect European ETF AUM will exceed $500 billion and ETF assets in Europe to grow by 30% (this includes net new assets and market move) in 2010,” said Fuhr.
“Despite the growth in usage of ETFs covering alternative asset class exposures, investors’ preference will continue to be for ETFs based on broad-market indices which serve as core holdings. This is essential, especially in today’s environment of increased market volatility. Since no single sector, style, or stock consistently outperforms its peers, having core holdings invested in broad-market indices not only helps reduce volatility but also can achieve competitive returns for the overall portfolio.”
“ETFs have fundamentally changed the way both institutional and retail investors construct investment portfolios,” said Fuhr. “We expect ETFs to continue to be one of the preferred investment vehicles for low cost beta exposure across both retail and institutional markets. Regulatory changes such as the Retail Distribution Review (RDR) seeking to ban commission in the UK retail market will have a significant impact on ETF usage in the next 18 months and we are seeing globally, the growth in institutional usage of European UCITS ETFs.”
“Product ranges are beginning to emerge in more specialized areas to cater for the growing number of professional and retail investors who want the advantages of ETFs but in a managed investment solution such as a funds of ETFs solution.”
“We are at an important crossroads in the ETF industry. We are seeing funds calling themselves ETFs which do not provide transparency on their underlying portfolios, do not offer in-kind creation/redemption and do not have real time indicative Net Asset Values.
Products which are not even funds are being called ETFs. Now that the industry accounts for over $1 trillion, product developers are working hard to find ways to put structured products, hedge funds and active funds into an ETF wrapper without maintaining the above basic features of an ETF. If this is allowed to continue we risk confusion, disappointment and disillusionment among investors which would be very negative for the ETF industry.”
Fuhr said that greater transparency around product structure, index replication methodology and pricing would prove vital to helping investors make informed investment decisions when considering ETFs.
“ETFs are one of the greatest financial innovations of the last decade in Europe and we expect a bright future but the industry is at a critical crossroads.”