Exchange Traded Funds was the topic of this month"s International Investment roundtable which saw some of the major European ETF players discuss the past, present and future of this growing asset class
History of the Industry
Adam Seccombe, business development director for Barclays Global Investors, London:
"ETFs have been around just over 10 years. They have been in Europe just over three years and the rate of growth in those three years within Europe outstrips the rate of growth in the US. So it is fair to say that Europe has been growing in a compressed time frame compared to what we saw in the US.
"The experience with launching the QQQ in 1999 in a very strong bull market led to the explosion of ETF assets. However, because some US ETFs are very big - like the Spider, which is a $40bn fund, some investors think that the European experience has not been so impressive but I think it has been."
Rainer Riess, director of stock market development for Deutsche Börse:
"The exchange landscape has seen very interesting growth as well. We launched our first ETF segment in Europe April 2000 on the Deutsche Börse soon to be followed by Euronext and other exchanges. I think that almost every exchange today offers an ETF trading venue of some sort.
"However, it has been really interesting to see that this is the first truly pan-European market in the sense that two players have over 80% of the market share and this is a product that is trading on the exchanges on a pan-European basis. We have seen an astounding growth of assets under management and there has been a similar growth in trades. To maybe go a little bit into the potential that may translate into, we have done a comparison with the US market. For ETFs to have the same turnover ratio that we currently see between Europe and the US in equities, the segment would still have to grow by about 10 times. I think that there is a lot of opportunity and chance left within the industry."
Demand and usage
Donna Moloney, regional director for STOXX covering Scandinavia, UK, Netherlands, Ireland: "The demand we see is that we are being split between insurance and pensions funds, hedge funds and predominantly institutions. I would say between 60% and 70% of the market by usage is institutions."
Thomas Meyer zu Drewer, member of the board of Indexchange, Munich:
"When stock markets do not go up you will not see any growth in ETFs because it has to do with interest in equities. Of course there are bond ETFs in our case but nevertheless it has to do with the markets."
Isabelle Bourcier, marketing director, Société Générale:
"All the providers are thinking in terms of their range of ETF products. We need to decide how many products can we manage and what kind of money we are willing to invest so that we can educate the final users."
Alex Kokkinos, an investment specialist from Investec Private Bank:
"The key word is education, especially for our clients - these guys are very, very sophisticated and are prepared to be radical. They are looking out for solutions to use as building blocks for the structuring of their portfolios.
Bourcier: "I think that one has to remember that ETFs are really the easiest and cheapest way to to buy the market performance. It is really an interesting trading tool."
Zu Drewer: "We see that ETFs are good substitutes for futures because you do not have any rollover costs"
Oliver Raess, director of institutional sales of Fresco index shares, UBS: "With regards to development of markets we are obviously quite happy about the growth overall of the ETF business but we also believe that that growth would have been much more substantial if we had been able to overcome some of the competitive hurdles. We have difficulties in passporting our ETFs in all the jurisdictions."
Rainer Riess: "It is probably more an area that politicians have not looked at. It is a big stumbling block to an industry that is fairly new.
"The legislation on a European scale does not really match up. Take the case of Germany - the regulation there states that clients have to file a prospectus with covenant authority in the stock exchange. Then they have to file an almost identical prospectus with the financial services regulators. And this has to be done just to get the permission for distribution within one country. There is a similar process for all the different countries you want to distribute your funds in.
"Once they are registered for distribution in Germany they are treated equally but you get that registration requirement in many countries so to have the right tax treatment and to have the right to public distribution you will need to register locally."
Oliver Raess: "Overall if you look at the structures of the various ETFs I think that would be interesting to see how the French Sicav would function. Predominantly you can say most of the ETFs are Ucits compliant and that works fairly well in passporting your ETFs into other jurisdictions.
"We found it very hard for instance in Germany because of income tax and dividends to market our ETFs there. Again, what comes into play is the multiple licences. In Germany we understand that this is being tackled and should disappear at some point in time. But then you have other markets with different forms of protectionism, if you want to call it that.
"For instance in France where we have listed our Eurostocks 50 product, you actually can only be registered for public sale when you list on the local exchange.
"Whereas Germany is much more friendly, Switzerland is also quite friendly. You do not necessarily have to list on the local exchange to be registered for public sale and these hurdles entail things such as having to translate the prospectus into the local language and so on and at the end of the day you don"t want it all.
The Business of ETFs
Seccombe: "The total expense ratio is a key component of analysing the cost of an ETF. For instance ETFs now in the US have a spread between around nine basis points up to 99 basis point and the sector funds in the US which are highly capitalised and well traded average something around 60 basis points whereas the BGI sector funds that closed had up to 40 basis points total expense ratio. The reason for closing the funds was because clients stopped using them and they were overly costly for us to maintain.
"We remain committed to ETFs in Europe and I think as a result of this cost issue we will come back to one or two of the headline funds. You could trade in I-shares S&P500 for nine basis points in the US but of course withholding tax issues are not a monopoly of European governments alone. The US withholds 30% of dividends on ETFs when held in the hands of a normal US investor, except if that vehicle is traded.
"So we have some mirror experience where the S&P 500 ETF is available in the states as a US structure subject to one profile of tax and then another ETF S&P 500 in Europe with higher internal fees but because the withholding tax is at a lower rate the client takes a bigger dividend. Issues like these are very confusing to all customers.
"If you have advisers who are sitting in France or Germany then they will understand they can only sell funds that are regulated in France and Germany. The moment they are in an offshore locale where they have that outreach to Europe products and US products the problem does not go away - it stays. I think each of the different issues has got a slightly different business plan."
Oliver Raess: "The recent closure of sector funds of several issuers in Europe including ours clearly shows that a certain level of assets has to be reached to make this an economically viable proposition but all the people present here have to have products where they actually make decent money and then all of us will have a couple of funds where we are making just below break- even levels.
"So overall in terms of consolidation in Europe with 15 issuers, there might be consolidation with one or two issuers getting together. You have a 115 to 120 funds in Europe of which 12 to 15 command 90% of the assets. So you can figure out where the money is being made, where the consolidation might take place and which funds might disappear."
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