The German blue-chip index underlies three of the five exchange-traded funds that have made it into the top 100 most traded equities in Europe, as we reported a couple of days ago. And today another major issuer joined the fray: Source’s launch of a DAX ETF was motivated, as the company’s CEO Ted Hood told me, by the desire to participate in one of Europe’s leading ETF products.
What have been the secrets of the benchmark’s success?
First, the DAX is the home country equity index for Germany, the largest European ETF market by number of listings (on the Deutsche Boerse’s XETRA platform) and reported trading volumes.
Second, DAX ETFs benefit from a liquid futures market, which makes it very easy for market makers to hedge positions. This, in turn, enables the bid-offer spread on DAX ETFs to undershoot the weighted average spread of the index’s constituent stocks. See the chart below, which is taken (along with the subsequent chart and table) from the excellent “Trading European Exchange-Traded Products” report published by iShares. There has been a steady decline in the cost of trading the iShares DAX ETF since late 2008 and current secondary market spreads, at around 4 basis points, compare with around 6 basis points for trading the DAX constituent basket.
Also, as Kris Walesby, markets analyst at iShares told me, there’s a great deal of competition amongst liquidity providers for this ETF, with the 10 or so official market makers supplemented by at least 20 more unofficial ones who trade using the direct market access facility provided by firms like Goldman Sachs and Bloomberg.
iShares DAX (DE) ETF Historical Secondary Market Trading Spread
The iShares trading report also highlights intraday variations in their DAX ETF’s secondary market spread, with the best dealing terms available late in the day, European time, after the US market opens. If you’re an ETF trader, this appears to be the time to place orders, although traded volumes suggest that most still prefer to transact in the morning.
iShares DAX (DE) ETF Secondary Market Intraday Trading Spread
The third factor behind the success of DAX-based ETFs is the existence of real competition amongst issuers. The table below shows that the average dealing spread for the quarter to November was around 4 basis points for the iShares, db x-trackers and ETFlab funds, which all have over €1 billion in assets, with slightly wider spreads in the funds offered by Comstage and Lyxor. There’s also pretty healthy average daily trading volume in all these funds. With Source now joining the fray, expect this competition to intensify.
Average Trading Spread And Depth For DAX ETFs
A transparent and well-known benchmark, plentiful hedging instruments, and competition both amongst issuers and market makers: these have combined in a virtuous circle to create Europe’s most liquid ETF.