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ETF AUM to exceed USD500bn by 2012


Marking the tenth anniversary of exchange-traded funds in Europe, BlackRock’s Deborah Fuhr, managing director and global head of ETF research and implementation strategy, has predicted an annual 30 per cent rise in ETF assets under management over the next few years, taking European ETF AUM to USD500bn by 2012.

The compound annual growth rate for ETF assets was 90.5 per cent in Europe over the past decade through year end 2009, which is significantly higher than the 58.1 per cent in the US and 56.3 per cent globally, demonstrating continued investor demand for ETFs.

On the anniversary of the first ETFs in Europe, which were first listed in April 2000 on the Deutsche Börse and London Stock Exchange, Fuhr provided five predictions for the ETF industry:

1. ETF assets to rise by 30 per cent in 2010

“With greater awareness of risk management, many investors have found that ETFs, which are structured as funds, meet their desire for greater transparency in relation to cost, investment holdings, liquidity, risk and return. By the end of 2012, we expect European ETF AUM will exceed USD500bn and ETF assets in Europe to grow by 30 per cent (this includes net new assets and market move) in 2010,” says Fuhr.

2. Preference for core beta ETFs will continue

“Despite the growth in usage of ETFs covering alternative asset class exposures, investors’ preference will continue to be for ETFs based on broad-market indices which serve as core holdings. This is essential, especially in today’s environment of increased market volatility. Since no single sector, style, or stock consistently outperform s its peers, having core holdings invested in broad-market indices not only helps reduce volatility but also can achieve competitive returns for the overall portfolio,” says Fuhr.

3. Significant growth across both institutional and retail investment markets

“ETFs have fundamentally changed the way both institutional and retail investors construct investment portfolios,” says Fuhr. “We expect ETFs to continue to be one of the preferred investm ent vehicles for low cost beta exposure across both retail and institutional markets. Regulatory changes such as the Retail Distribution Review seeking to ban commission in the UK retail market will have a significant impact on ETF usage in the next18 months and we are seeing globally, the growth in institutional usage of European Ucits ETFs.”

4. Development and growth of investment styles that employ products like ETFs will be used as building blocks for delivering low cost beta

“Product ranges are beginning to emerge in m ore specialized areas to cater for the growing number of professional and retail investors who want the advantages of ETFs but in a managed investment solution such as a funds of ETFs solution,” says Fuhr.

5. The risk of confusion, disappointment and disillusionment among investors would be very negative for the ETF industry

“We are at an important crossroads in the ETF industry. We are seeing funds calling them selves ETFs which 1) do not provide transparency on their underlying portfolios, 2) do not offer in-kind creation/redemption and 3) do not have realtime indicative net asset values. Products which are not even funds are being called ETFs. Now that the industry accounts for over USD1trn, product developers are working hard to find ways to put structured products, hedge funds and active funds into an ETF wrapper without maintaining the above basic features of an ETF. If this is allowed to continue we risk confusion, disappointment and disillusionment among investors which would be very negative for the ETF industry,” says Fuhr.

Fuhr says greater transparency around product structure, index replication methodology and pricing would prove vital to helping investors make informed investment decisions when considering ETFs.

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