Landmark year as ETFs celebrate 20 years

April 11^th marked the 20^thanniversary of the listing of the first ETFs in Europe the LDRS DJ STOXX 50 and LDRS DJ EUROSTOXX 50 sponsored by Merrill Lynch on the Deutsche Borse, closely followed by the listing of the iShares FTSE 100 ETF on the London Stock Exchange on April 28^th 2000.

Data published by ETFGI this month showed that the European Exchange Traded Product (ETP) market, including funds and commodities, passed $1trn in assets for the first time at the end of 2019.

The European ETFs/ETPs industry had 2,198 ETFs/ETPs, with 8,401 listings, assets of US$1.027 trillion, from 70 providers listed on 27 exchanges at the end of 2019

Despite this rapid growth it is still dwarfed by the market in the US where over $4.4 trillion is tracking ETPs; however, wider adoption of ETFs is predicted by both institutional and retail clients, as more wealth managers and private investors embrace the advantages that ETFs offer.

There has also been an expansion of the variety of products, asset classes and geographic reach available through ETFs; last year, nearly 200 new ETPs were listed on London Stock Exchange and the most active ETPs on the exchange covered a range of strategies, from the S&P 500 to gold to emerging markets bonds.

‘an expansion of the variety of products, asset classes and geographic reach available through ETFs’

2019 saw substantial growth in the trading of ETPs and tightening of spreads and bond ETFs have grown in terms of capital inflow and trading volume; there are now 350 fixed income ETFs listed on London Stock Exchange, with 63 of these listing in 2019 and the highest inflows.

A growing number of investors have found ETFs to be useful tools during times of volatility, and a low interest rate environment.

Index providers, such as FTSE Russell, have expanded their fixed income index offerings, to include a wide range of market segments across credit quality, sector and region.

ETFs provide easy access to broad fixed income markets via a single trade on an exchange, offering instant diversification relative to individual bond investing via a limited retail bond market.

The ETF product evolution has shaped the profile of ETFs and ETPs users, initially appealing to equity-focused investors and evolving over time to multi-asset class and fixed income and commodity specialists.

Today, slightly more than half of all ETFs and ETPs in Europe provide exposure to equity indices and account for 60% of all assets.  Fixed Income products account for 28% of assets, 10% of assets are in products providing exposure to commodities while 1% of the assets are in Active strategies.

ETFs are uniquely the only democratic investment product being used by institutional investors, financial advisors and retail investors.

‘ETFs are an efficient way to access the green economy and grow ESG equity and bond portfolios’

As investors seek to integrate a sustainable investment philosophy into their passive strategies, demand for ESG ETFs will continue to increase in 2020. 77 ESG-related ETFs chose to list in London, recording a total traded value of £732m in 2019, up 102% year-on-year. ETFs are an efficient way to access the green economy and grow ESG equity and bond portfolios.

The green economy represents 6% of the market capitalisation of global listed companies, approximately $4 trillion, and it is also producing results, with FTSE Russell sustainable indexes outperforming their underlying benchmarks over the last five years.

As the European ETF market and passive investment strategies continue to grow in popularity and increasing focus on liquidity and being able to trade intra-day, more financial advisors and wealth managers are predicted to use ETFs to offer diversification, liquidity and transparency to investors.

ETFGI lists the Top 10 benefits of ETFs as being:

• ETFs are UCITS funds
• Transparency– a key defining feature; all holdings are published daily
• Cost effective– ETFs do not have sales loads and most have lower fees than other products offering similar exposure
• Flexibility– ETFs trade and settle like stock, have intraday pricing and trading, allow stop and limit orders, can be bought in increments of one share and can be used to go long or short
• Diversification– instant, low cost exposure to entire benchmarks in a single trade
• Liquidity– there are two sources: secondary, which is volume on an exchange; and primary, which is due to the creation/redemption process. Generally, an ETF is as liquid as its underlying components; however, the spreads of larger funds may be tighter than those of their individual holdings in the secondary market
• Investment objectives– ETFs suit a variety of uses and can be tools for long-term strategic core positions, short-term tactical allocations, and over- and underweighting holdings
• Cash management– including cash equitisation, manager transitions, tax loss harvesting
• Risk management – employing ETFs to hedge positions, avoid stock- and market-specific risks
• Derivatives alternative– for institutional investors unable to include derivatives in their portfolios, ETFs are an attractive alternative.

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