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Exchange-traded fund numbers set to reach 1,500, says Morgan Stanley survey

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At the end of June there were 953 exchange-traded funds worldwide with 1,494 listings and assets of USD688.8bn, managed by 66 managers and listed on 41 exchanges, according to the latest s

At the end of June there were 953 exchange-traded funds worldwide with 1,494 listings and assets of USD688.8bn, managed by 66 managers and listed on 41 exchanges, according to the latest survey of the sector by Morgan Stanley, and a further 524 ETFs are currently in the pipeline.

Morgan Stanley, which predicts that ETF assets will reach USD2bn by 2011, says that while the US market still represents the lion’s share of the industry in terms of fund numbers and assets under management, ETFs are growing strongly in other regions of the world.

At the end of June the US accounted for 499 ETFs with assets of USD469.5bn, followed by Europe with 336 ETFs and assets of USD107.7bn, and Japan with 13 ETFs and USD49.8bn in assets. Morgan Stanley has identified a further 93 exchange-traded products with 234 listings and assets of USD32bn, managed by 13 managers on 11 exchanges.

A total of 239 new ETFs were launched in the first six months of this year, according to Morgan Stanley, whose ETF research is led by managing director Deborah Fuhr. ProShares accounted for the largest number of new products with 40 ETFs, followed by Claymore Investments with 26 and BGI/Indexchange and DB Platinum Advisors with 24 ETFs each. Plans have been announced by fund sponsors to launch a further 524 ETFs, 390 in the US, 83 in Europe and 51 in the rest of the world.

In the first six months of this year worldwide ETF assets grew by 18.3 per cent in US dollar terms, from USD565.59bn to USD668.83bn. European-listed ETF assets increased by 20.1 per cent to USD107.68bn, ETFs in the US grew by 15.4 per cent to USD469.45bn and ETF assets in Japan rose by 43.8 per cent to USD49.82bn.

The assets under management of other exchange-traded products rose by 13.9 per cent in the first half of the year, driven by US-listed exchange-traded commodities, whose assets grew by USD2.7bn. The assets of US-listed exchange-traded currency products increased by USD1.1bn, while the assets of European exchange-traded commodities grew by USD1bn.

Morgan Stanley says that worldwide average daily ETF trading volumes continue to increase dramatically. At the end of June the worldwide 20-day average daily trading volumes in US dollar terms was USD57.9bn or 915 million shares, having increased by 135.5 per cent from USD24.5bn at the end of 2006. The largest percentage increase was in South Africa, followed by China and the US.

Four managers entered the ETF market in the first half of the year. DB Platinum Advisors is the largest new manager in terms of assets with USD1.2bn assets under management in 24 ETFs, followed by Horizon BetaPro Management with assets of USD300m in 8 ETFs and XShares Advisors with assets of USD100m in 18 ETFs.

The first half of this year saw the acquisition of Munich-based Indexchange Investment from Bayerische Hypo-und Vereinsbank, owned by Italy’s Unicredito group, by UK-based Barclays.

The combined BGI/Indexchange business is by far the largest ETF manager worldwide with total assets of USD357.4bn, a global market share of 52.6 per cent, followed by State Street Global Advisors with USD101.1bn (14.9 per cent). In terms of product numbers, BGI/Indexchange is also far out in front with 291 ETFs, followed by PowerShares with 84.

According to another survey by Morgan Stanley, the proportion of institutional investors using ETFs continues to grow significantly. A total of 2,214 institutions worldwide reported investing in one or more ETFs, in increase of 15 per cent from 1,924 in December 2006, according to data from Thomson Financial’s database of fund filings.

The number of users has increased by 1,242 per cent over the past nine years, from 165 institutions in December 1997. The number of hedge funds reporting investment in ETFs has risen by 36 per cent over the past year.

Morgan Stanley says investors are increasingly using ETFs to easily gain beta exposure to international and emerging market benchmarks in order to devote their resources to capturing alpha by selecting stocks in markets where they feel they can add value.

ETFs listed in the US providing exposure to international and emerging market equity benchmarks saw their assets grow by 27.5 per cent, while the assets of ETFs focused on the US market grew by 9.7 per cent.

At the end of June, 26 managers accounted for Europe’s 336 ETFs, with 772 listings on 18 exchanges, with assets under management up 20.1 per cent to USD107.7bn in the first half of the year. Six European ETFs have assets of more than USD3bn and 24 have assets of more than USD1bn.

Following the acquisition of Indexchange in February, BGI has consolidated its position as the largest manager of ETFs in Europe in terms of both number of products (128) and assets of USD51.8bn, giving it a 48.1 per cent market share. Lyxor Asset Management was second with 75 ETFs and USD28.5bn (26.5 per cent), followed by Axa/BNP with 26 funds and assets of USD5.9bn, a 5.5 per cent market share.

In addition, 37 exchange-traded commodities from two managers accounted for 173 listings on four exchanges at the end of June. During the first half of the year the assets of exchange-traded commodities in Europe increased by 48.6 per cent YTD to USD3.1bn.

A total of 63 new ETFs were launched in Europe in the first half, with a further 83 in the pipeline. DB Platinum Advisors launched the largest number of new ETFs with 24, followed by Lyxor with 22 and SG Asset Management with five.

Funds providing exposure to European countries are the most popular, accounting for 25.9 per cent of assets, followed by ETFs covering regional Eurozone indices with 19.8 per cent of assets under management.

ETFs have official listings on 18 exchanges in Europe, with the XTF segment of Deutsche Börse the continent’s leader in June with a 45 per cent market share. Euronext, which offers ETF trading in Amsterdam, Brussels and Paris, was second with 25.2 per cent, while Borsa Italiana – just acquired by the London Stock Exchange – was third with 10.8 per cent.

The average total expense ratio for equity ETFs in Europe now stands at 46 basis points per annum, which is significantly below the average ratio of 100 basis points for equity index funds in Europe and the average of 191 basis points for active equity funds, according to Lipper/Fitzrovia.

The average total expense ratio for fixed-income ETFs is 18 basis points per annum, which is less than one-sixth of the 109 basis points charged by fixed-income funds in Europe, according to Lipper/Fitzrovia.

The first option on an ETF, the MidCap SPDR, began trading on the American Stock Exchange in November 1998. There are now 282 options and 12 futures on ETFs listed on exchanges in the US, Europe and Canada. In the US there are 270 options on ETFs, which means that 54.1 per cent of US-listed ETFs have options.

Morgan Stanley notes that in the US, trades that involve shorting ETFs were exempt from the uptick rule, abolished by the Securities and Exchange Commission in July, which permitted short sales of exchange-listed stocks only at an uptick in price.

In June the short interest level for ETFs and HOLDRs (holding company depository receipts) listed in the US was 1,392 million shares, equivalent to 18.6 per cent of ETF shares outstanding and above the average short interest level for 2006.

The past six months have seen a proliferation of new indices from index providers designed to serve as the basis of new ETFs, the report says, including indices that use diverse weighting methodologies, including market capitalisation, equal weight, price, dividend and other fundamental factors.

For example, the FTSE RAFI Index Series employs weighting that use four fundamental factors, total cash dividends, free cash flow, total sales and book equity value, rather than traditional market capitalisation.

WisdomTree has created dividend-weighted indices where the stocks weight is based on either the amount of cash dividend or the dividend yield of the companies in each index. Many index providers are also working on creating Shariah-compliant indices.

Meanwhile, many exchanges in both developed and emerging markets are planning an ETF trading segment or are studying the prospects of creating a segment. Sometimes the process of creating the segment and the corresponding regulations can take many years, as was the case for the Spanish Stock Exchange. BBVA Gestion launched the first IBEX 35 ETF, its first ETF, in Spain on July 20, 2006 and Santander Asset Management launched the Santander ETF IBEX 35 on September 14.

Given that many of the ETFs on new exchange platforms are launched by local asset managers, Morgan Stanley predicts growth in the number of managers that have their own client basis to tap into to boost assets in their ETFs.

Morgan Stanley’s prediction that ETF assets will grow to more than USD2trn in 2011 is based on factors including the continuing increase in the number of institutional and retail investors who use ETFs, and funds making larger allocations to ETFs as a result of recent regulatory changes in the US, Europe and various emerging markets.

It also points to the expansion in the number and type of equity, fixed income, commodity and other indices covered, the development and growth of investment styles that employ low-cost beta-delivering products such as ETFs, the launch of new ETF trading segments by stock exchanges and the likelihood of continuing growth in the number of new issuers and managers of ETFs.

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