Can The Growth Rate Continue?

Overall European ETP assets under management increased by 28%, from €107 billion to €137 billion, in the year to end-July 2009 as the decline in equity markets held back overall fund totals. Measured as a percentage of the original asset total, the €41 billion of ETP inflows represents a growth rate of 38%.

There are some signs that the rate of fund inflows is slowing down. iShares reports that, of the €41 billion invested, only €19 billion came during the first seven months of 2009, down from €22 billion in the last five months of 2008. Many equity ETFs saw net outflows during January and February this year, although this may be due to seasonal factors or could reflect panic selling by retail investors as markets moved towards their early-March lows.

Looking at the breakdown of asset flows by sector, it’s notable how conservative investors have been. Inflows have very much been concentrated on the more traditional indices – broad equity and fixed income benchmarks – with a significant additional funds flow to commodities. The “style ETF” sector, which includes dividend-weighted, thematic, ethical and non-cap-weighted funds, has shrunk in relative size over the last two years, from 6% of the overall market to under 3%. The weighting of sector ETFs has also dropped over the last few years, with a current market share of under 6%. Non-delta-one ETFs (those offering inverse and/or leveraged exposure), with a 2.7% market share, are still relatively insignificant in Europe, in contrast with the US ETF market where they have at least double this in assets.

In the early years of the ETF market the name of the game was index innovation and finding new ways to track the market. More recently, however, the emphasis has been very much on cost and brand-name indices, as HSBC’s recent fund launch illustrates. Will this focus be enough to keep the European ETF market growing at a near-40% pace, or will a second round of innovation be required to hit some of those ambitious targets for assets under management that get bandied around? Time will tell.

Meanwhile, as the warm weather departs (from London, at least), conference season recommences. Terrapinn’s two-day event in London on September 21-22, which I will be attending, includes interesting-sounding sessions on choosing tracker products, ETF liquidity and the best way to achieve short exposure. I’ll be taking a late summer holiday before then, but I hope to see some of you there!

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