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The ETF market is the fastest growing segment of the asset management industry

Global ETF assets - these index products emerged in the asset management industry in the early 2000s - have reached the record level of 2 400 billion at the end of 2013, reaching global hedge fund assets...

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Global ETF assets - these index products emerged in the asset management industry in the early 2000s - have reached the record level of 2 400 billion at the end of 2013, reaching global hedge fund assets.

As stated by Arnaud Llinas, Global Head of ETF and Indexing at Lyxor Asset Management, "the ETF market is growing very rapidly in the world, with an average annual growth rate above 10% for the last 15 years." However, the room for improvement is still important. Indeed, according to a recent study published by the Boston Consulting Group, at the end of 2013, global passive management assets (including ETF) stands at 15% of the asset management industry.

ETF have been popular for their simplicity, a permanent listing (as opposed to mutual funds that have a maximum daily liquidity) and their lower cost compared to actively managed funds, especially compared to "hedge fund" for example. Arnaud Llinas recalls that "the annual management fees are generally below 0.3% for ETF replicating the major indices."

Another reason explaining this success is tied to increased supply during the recent years, providing investment solutions accross all asset classes.

For example, "over the last 5 years, the number of ETF has doubled in Europe" added Arnaud Llinas. Nevertheless, this market is dominated by a few players. According to ETF GI, three providers (iShares, SPDR State Street Global Advisors and Vanguard) out of 225, account for approximatively 70% of global assets; raising obviously the question regarding oligopoly risk. However, this risk is related to the industry nature because as Arnaud Llinas recalls, "investors tend to focus on the most liquid ETF, the critical size is reached around 100 million euros." Thus, "a provider reaches its breakeven point probably close to 10 billion euros of assets under management level" he added.

But this market offers niche segments for providers offering innovative indexing, as shown, for example the recent success of the american company WisdomTree, which has managed to collect billions of dollars on its WisdomTree Japan hedged equity product, invested in Japanese equities and hedged against currency risk.

In Europe, other providers are also positioned on niche sectors, in particular the Smart Beta approach, such as Ossiam, a subsidiary of Natixis Global Asset Management.

Isabelle Bourcier, Head of Business Development at Ossiam indicates that their US Minimum Variance ETF, launched in 2011, stands at approximately Eur 630 million of assets under management.

Other providers are diversifying their offer. For example ETF Securities, who is well known for its expertise on commodities since the launch of the first Gold ETP in the world, in 2003, is today aiming to “intelligently diversify its business with the launch of new innovative access products on the other asset classes; for example the launch of an ETF on China A shares or another ETF on US energy infrastructure” as indicated by Henri Boua, Associate Director for France and Monaco.

However, unlike the United States, the European ETF market is currently facing multiple listing, with five major exchanges: Paris, London, Frankfurt, Milan and Zurich. Arnaud Llinas, "a concentration of liquidity would be appropriate and beneficial for both investors and issuers."

Moreover, institutional investors do not hesitate to use the OTC market to trade these products.

A significant portion of transactions is achieved through this market, raising the question of accurate accounting. The MIF2 directive, due to come into force in January 2017, should correct these shortcomings weighing on market liquidity, with a reporting obligation on exchanges, as this is the case in the United States. Meanwhile, in Europe, ETF have adopted most of the UCITS brand, from another European directive harmonized the rules for constructing own mutual funds. All this is more likely to encourage the development of European ETF market in the coming years and boost this segment of the asset management as a whole.

Next Finance , November 2014

Article also available in : English EN | français FR

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