ETF Landscape: Celebrating 10 Years of ETFs in Europe - BlackRock

ETF Landscape April 2010Celebrating 10 Years of ETFs in Europe from BlackRockCelebrating 10 Years of ETFs in EuropeThis special edition of ETF Landscape is BlackRock’s comprehensive report on the history and outlook for the ETF industry inEurope. The report covers Exchange Traded Funds (ETFs) and Exchange Traded Products (ETPs). ETFs are open-end index fundsthat provide daily portfolio transparency, are listed and traded on exchanges like stocks on a secondary basis as well as utilising aunique creation and redemption process for primary transactions. ETPs are products that have similarities to ETFs in the way theytrade and settle but they do not use a mutual fund structure. The use of other structures including grantor trusts, partnerships,notes and commodity pools by ETPs can create different tax and regulatory implications for investors when compared to ETFs,which are funds. This commentary should not be regarded as a research report 1 .April 2010 marks the 10th anniversary ofthe launch of the first Exchange TradedFunds (ETFs) in EuropeWe take this opportunity to reflect on the history of ETFs as well asconsider the outlook for the future of ETFs in Europe.HighlightsThe rate of growth in terms of assets, number of products, listings,exchanges and providers has been greater in Europe than theexperience of ETFs in the early years in the US. Over the pastdecade through year end 2009 the compound annual growth ratefor ETF assets globally was 56.3%, it was 58.1% in the United States,53.1% in Canada and 90.5% in Europe, and there are no signs thatinvestor interest in ETFs is fading. Investors are finding that ETFs areproducts that work well in every market environment.Exchange Traded Funds have become popular and widely usedinvestment vehicles. In a world where investment products comeand go with the blink of an eye, ETFs might be considered one ofthe most innovative financial products in the last two decades. Theyhave fundamentally changed how both institutional and retailinvestors construct their investment portfolios.ETFs have opened a new panorama of investment opportunities.Essentially, ETFs are index funds that are listed and traded onexchanges like stocks, allow investors to gain broad exposure tospecific segments of equity, fixed income, and commodity marketswith relative ease, on a real-time basis, and at a lower cost thanmany other forms of investing. ETFs are based on sector, large-cap,mid-cap, small-cap, value, growth, domestic, international countryand regional equity indices, commodities and currencies as well ason corporate, credit, inflation and government fixed income indices.ETFs typically can be used to short indices, are lendable, and arepurchased on a commission basis just like other equities.ETFs offer many advantages. We believe that growth in the use ofETFs reflects their many advantages. They trade throughout the dayon major securities exchanges and can be bought and sold usingmarket, limit, or stop orders. ETFs are funds, not derivatives, whichallow investors to quickly react to short and long-term needs oropportunities. As such, they may serve as an alternative to futures,trading baskets of stocks and traditional mutual funds. ETFs do nothave any sales loads, although they do, like mutual funds, haveannual expense ratios, albeit less than traditional funds, rangingfrom zero to 1.81%. In fact, ETFs have some of the lowest expenseratios among registered investment products. Recent interest frominvestors has been partially fuelled by attempts to avoid accounting,earnings, and other stock-specific risks.ETFs are index-based 2 open-ended funds that can be bought andsold as quickly and easily as ordinary shares on a stock exchange –they have become popular and widely used investment vehicles toachieve many investment strategies: To gain diversified exposure to a market For core/satellite investing. For buy and hold investing. For active traders who wish to take advantage ofmarket movements. For investors wishing to hedge the market. As an alternative to futures and other institutionalinvestment tools.European ETF statistical update(end of January 2010) 3 At the end of January 2010 the European ETF industry had 896ETFs with 2,468 listings, assets of US$217.9 Bn, from 34providers on 18 exchanges. YTD assets have decreased by 4.0%, which is less than the 5.9%fall in the MSCI Europe Index in US dollar terms. The top 50 ETFs, out of 896, account for 52.6% of EuropeanETF AUM. The top 100 ETFs, out of 896, account for 69.5% of EuropeanETF AUM. There are 181 ETFs in Europe with less than US$10.0 Mnin assets. YTD the number of ETFs increased by 8.1% with 67 newETFs launched. YTD the number of exchanges with official listings remains at 18. YTD the average daily trading volume in US dollars increased by24.5% to US$2.8 Bn. Most ETF trades are not required to bereported in Europe as ETFs are not covered by the EuropeanUnion Directive on Markets in Financial Instruments (MiFID). The top three ETF providers, out of 34, have 74% market share. iShares is the largest provider of ETFs in Europe in terms of bothnumber of products, 172, and AUM of US$82.5 Bn, reflecting37.9% market share; Lyxor Asset Management is second with127 products and US$43.8 Bn, a 20.1% market share.db x-trackers is third with 118 products and assets ofUS$35.8 Bn and a 16.4% market share.1. Certain terms used in this publication may differ from those applied by other industry participants.2. Most are index-based, but some are active.3. Source: Various ETF providers, exchanges, Global ETF Research and Implementation Strategy Team, BlackRock, Bloomberg data as at 29 January 2010.This document is not an offer to buy or sell any security or to participate in any trading strategy. Please refer to important information and qualifications at the end of this material. 2