Increasing assets under management in exchange traded funds (ETFs) are a clear evidence of investors’ widespread interest for these open ended index-tracking instruments, which trade on stock-exchanges like any other stock and are cheap, liquid and transparent. At the end of 2009, global ETF assets broke through the $1,000bn (E728bn) milestone and in Europe, where ETFs were introduced around 10 years ago, assets hit an all time high of $223bn, according to data from BlackRock.
While the ETF industry is dwarfed by mutual funds in Europe, which account for $7,000bn of AUM, net sales of ETFs domiciled in Europe soared to $40.3bn during the first 11 months of 2009 versus net sales of mutual funds (excluding ETFs) of $230.1 bn according to Lipper FMI. The ETFs listed in Europe escalated to 896, surpassing the 791 in the US. But is this actual innovation or just proliferation, and is this expanding choice beneficial for investors or just confusing? Moreover, there are concerns that innovation may bring with it more complex products, which could somewhat betray the true nature of this passive instrument.
“We launch new ETFs systematically to meet client demand, but whatever the innovation we provide, we absolutely make sure that the ETF remains simple to understand and that the underlying index is liquid, clear and transparent” says Valérie Baudson, managing director of Amundi ETF, the newly re-branded ETF range of the asset management group formed by the merger of Crédit Agricole Asset Management and Société Générale Asset Management, previously Casam ETF.
An example of a successful innovation has been an ETF tracking the MSCI world ex EMU. The idea came from professional European investors who wanted to find a very simple, quick and transparent way to invest in the world equity market, without that interfering with their Eurozone investments, says Ms Baudson.
The French firm, which last year more than doubled its assets under management to E3.3bn and launched the highest number of ETFs in Europe, recently listed six unprecedented short bond ETFs, offering a reverse exposure to EMU government bonds with maturities ranging from one to 15 years. These short ETFs are for investors that have a view that interest rates are going to increase in the future, because if interest rates grow, the bond price will decrease and the short index will grow. “Investors can be bullish on a certain maturity and bearish on others, and they can express their views by investing in long and short ETFs,” she says.
Buying a short ETF is different from shorting an ETF. For the majority of the European markets and a large part of the US market, shorting an ETF is either very expensive or just not possible for investors, due to the difficulties in finding the borrower in the ETF in order to be able to short it, ie selling borrowed assets with the view of buying them back at a lower price, thus making a profit.
“The key issue is that an ETF has to have enough assets under management that people are going to be able to lend, for the period you need and the price you think is acceptable,” explains Scott Thompson, co-head of European sales at ETF Securities. The cheaper alternative is to buy an inverse or short ETF, which offers a similar pay-off structure. Investors earn one per cent, prior to the cost of management fee, for every per cent the benchmark goes down in one day. To make the monitoring of performance easier for investors, European ETF issuers, unlike their US counterparts, have tended to launch inverse ETFs that track inverse benchmarks, so that an inverse ETF just have to track that specific index.
“ETFs provide investors with the opportunity to play both the long side and the short side, depending on their views, and in an uncertain world that is incredibly valuable and useful.” ETF Securities, which in 2009 almost tripled its assets to $17bn assets, of which the majority are in commodities, is within the top three issuers of inverse ETFs and ETCs (exchange traded commodities) in the world, he says.
“In 2008, when the oil price was very high, there was more trade going on in our short oil product than all the other ETFs on the London Stock Exchange put together. Clearly the investment community believed that the oil price was going to come down.” Most recently, people are looking at short exposure to industrial metals, says Mr Thompson. “Inverse ETFs are more active type of products and people trade with short-term horizons. When the market sentiment begins to change, you find a big asset reallocation coming out for instance a long product and buying an inverse ETF.”
