By Stephan Kraus, Senior Vice President of Market Development, Deutsche Börse AG.
Since their European introduction on Deutsche Börse’s Xetra platform in 2000, ETFs have proven themselves as one of the most successful instruments in European capital markets. Over the course of just 13 years, assets under management have grown from EUR 400 million in 2000 to 213 billion in May 2013. In the same time period, the number of listed products has increased substantially from two ETFs to more than 1,000 products as of today. As unique as these impressive growth rates, are the product characteristics that helped ETFs to gain such popularity: ETFs combine the advantages of both equities and structured products while avoiding the downsides of these two instrument groups. ETFs can be traded as continuously and as liquid as equities, but they do not share the disadvantage of being the single, undiversified investment that equities stand for. Very similar to certificates, ETFs offer a wide application spectrum since whole markets and sectors can be tracked, making them ideal instruments for risk diversification. However, unlike structured products, ETFs do not suffer from the inherent issuer default risk.
Besides the flexibility of being able to enter and exit markets throughout the trading day, another main reason for institutional investors to pick up ETFs are their low costs and high level of transparency. Both aspects can be applied to the ETF itself as well as to the trading layer. While ETFs are already well-known for their low annual expense ratios and high degree of transparency in terms of investment objectives, replication methodologies and portfolio compositions, trading costs have also become increasingly important when comparing ETFs across markets.
Correspondingly, we have established various liquidity incentivisation programs to facilitate the implementation of cost-effective trading and investment strategies within a highly liquid trading environment. As a consequence, blue chip ETFs have become the most liquid instruments tradable on Xetra. The Xetra Liquidity Measure (XLM) – a means to improving transparency for market participants by estimating market impact in advance – shows a decrease in implicit transaction costs of 80 percent for the 20 most liquid equity ETFs on Xetra from 2003 to today.
The growing product awareness among both institutional and retail investors will continue to set the path for future growth in the ETF space. It is also easy to foresee that this demand will lead to more innovation in the years to come, be it in terms of new markets covered or the way ETFs are employed as investment and trading tools. Further supporting these developments and creating further trading opportunities, is the recent introduction of new exchange traded derivatives on ETFs through Eurex, Europe’s largest derivatives exchange.
Staying Power: Why the ETF boom is bound to last
