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Global ETF assets to reach USD2trn by 2011, says Morgan Stanley

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Global assets of management in exchange traded funds are on course to exceed USD2trn in 2011, according to Morgan Stanley’s latest report on the industry, which found that at the end of th

Global assets of management in exchange traded funds are on course to exceed USD2trn in 2011, according to Morgan Stanley’s latest report on the industry, which found that at the end of the first quarter of this year, 67 managers were running 847 ETFs worldwide with assets of USD604.2bn and 1,235 listings on 39 exchanges.

The US has the largest number of products with 428 ETFs and the greatest volume of assets under management with USD428.4bn, followed by Europe with 299 ETFs and USD98.7bn and Japan with 13 ETFs and USD32.5bn. A total of 115 ETFs were launched in the first three months of 2007, and managers have announced plans to launch a further 543 ETFs, 395 in the US, 104 in Europe and 44 in the rest of the world.

Worldwide ETF assets increased by 5.3 per cent in the three months to the end of March, with assets in Europe growing by 10 per cent and in the US by 5.3 per cent, while ETF assets in Japan declined by 6.1 per cent.

Morgan Stanley says there are 81 other exchange-traded products with 160 listings and assets of USD31.6bn, managed by 11 managers on nine exchanges around the world. The assets of these products grew overall by 12.3 per cent, driven by an increase of USD2.5bn in US-listed exchange-traded commodities, followed by US-listed exchange-traded currency products with growth of USD700m and European ETCs assets with USD600m.

In the first three months of this year, worldwide 20-day average daily ETF trading volumes, increased by 73.9 per cent in US dollar terms, from USD24.5bn at the end of 2006 to USD42.7bn, or 732m shares. The largest percentage increase was in Malaysia, followed by India and Japan.

Morgan Stanley has recorded a 27 percent increase in the number of institutional investors reporting holding one or more US-listed ETFs or HOLDRs (holding company depositary receipts) over the previous year. Over the past six years, the number of users has increased by 345 per cent, while the number of hedge funds that reported using US-listed ETFs or HOLDRs over the previous year grew by 61 percent.

Morgan Stanley’s forecast that ETF assets will exceed USD2trn trillion in 2011 is based on a number of factors, including a continuing increase in the number of institutional and retail investors who use ETFs and view them as useful tools, as well as funds making larger allocations to ETFs based on recent regulatory changes in the US and Europe.

The bank’s head of ETF investment strategies, Deborah Fuhr, believes strong asset growth will also be driven by an expansion in indices and in the number and types of equity, fixed income, commodity and other indices covered, the development and growth of investment styles that employ products such as ETFs to deliver beta, the plans of many stock exchanges to launch new ETF trading segments, and an expected increase in the number of new issuers and managers of ETFs.

Four new ETF managers entered the market in the first three months of the year. DB Platinum Advisors became the largest new ETF manager in asset terms with USD510m under management in eight ETFs, followed by BetaPro Management with assets of USD90m in two funds and XShares Advisors with assets of USD60min 14 ETFs.

In February HVB’s ETF business, Indexchange Investment, became part of the Barclays Group. Munich-based Indexchange has traditionally focused on the German market and will continue to provide some services to the business including market-making, custody and depot bank services.

The combination of BGI and Indexchange is the largest ETF manager worldwide with aggregate assets of USD323.9bn, a market share of 53.6 per cent, followed by State Street Global Advisors with USD101.5bn (16.8 per cent). In terms of product numbers, BGI/Indexchange is ranked first with 280 ETFs, followed by PowerShares with 75. ProFunds launched the largest number of new products in the first quarter with 40 ETFs, followed by XShares Advisors with 14 and BGI/Indexchange with 13.

At the end of March 256 options and 12 futures on ETFs were listed on exchanges in the US, Europe and Canada. The first option on an ETF, the MidCap SPDR, began trading in November 1998 on the American Stock Exchange. In the US there are 244 options on ETFs, which means that 57 per cent of US-listed ETFs have options.

In the US, trades that involve shorting ETFs are exempt from the up-tick rule. In March the short interest level for ETFs and HOLDRs listed in the United States was 1,085m shares, equivalent to 15.1 per cent of ETF shares outstanding and above the average short interest level for 2006.

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