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2011 strongest year yet for global ETF market, says Deutsche Bank


ETF assets registered total growth of 3.2% in 2011, according to Deutsche Bank’s ETF Market Review of the year. Comparing this to prior year growth rates, often over 30%, could provide an unfavourable picture and be perceived as a slowing down of the industry. However, this observation on the surface masks the fall in asset prices over the year, which contributed a decline of 9.3% to global ETF assets.

In fact, 2011 was the strongest year on record for the global ETF industry, however, growth strength varied in different geographical regions. Factors such as the economic environment, increased pressure on money managers to generate positive performance, regulatory scrutiny and industry competitive dynamics were just a few of the forces that contributed towards different fortunes among the world’s ETF geographical regions.
On a global level, ETFs exhibited strength on a number of fronts in 2011:
Increased Usage: ETFs became more widely used over 2011. This is captured by two key market metrics: The percentage of ETF flows when compared to mutual fund flows [ETF adoption rate] and the percentage of ETF turnover as compared to that of cash equities in general.
ETFs are now almost a third [29.6%] of the cash equities turnover in the US [up from 24.0% in December 2010], while that number for Europe registered at 8.7% [up from 6.9% over December 2010].
Furthermore, ETFs continue to advance against mutual funds, registering at 9.0% of mutual funds assets in the US and 2.8% in Europe, up from 8.4% and 2.7% last year respectively. Perhaps most impressive is the comparison of new money that listed [ETFs] and unlisted [mutual] funds have received over 2011. US ETFs received 2.8x higher flows than the ten-fold larger mutual fund industry. European ETFs received 2.2x higher flows than the thirty-plus-fold larger UCITS mutual fund industry. The numbers in Europe point to the conclusion that the weakness in the local ETF market is not specific to ETFs but more likely due to uncertain market conditions.
New money: The global ETF industry registered the strongest absolute cash inflows since its creation, totalling USD163.8 billion during 2011. This was a marginal improvement [+0.5%] from the USD163.0 billion that the industry gathered in 2010, when its assets grew by 26.2%. 2011 inflows demonstrate the ETF industry’s ability to continue attracting investors amid choppy market conditions.
New Products: The highest number of new ETFs launched in a single year was also registered in 2011, totalling 549. All asset classes exhibited strength, including equity with a total of 358 new launches, but two new characteristics distinctly marked the new ETF launch calendar in 2011:
Fixed income ETFs saw 116 new launches over the year, up from 96 last year. This asset class showed particular new asset gathering strength in the US [USD48.0 billion] but the European new ETF launch calendar demonstrated strength with novel products such as short exposure to sovereign indices.
ETFs with benchmarks that track non-capitalisation weighted indices, such as factor based, volatility-related, and equally weighted indices are a new niche that became stronger this year. This was a trend that provided an entry point for a few smaller ETF providers over 2011. As market conditions became more challenging, extracting positive returns has created demand for these more novel investment solutions.
The vast majority of ETF [97% at a global level] assets are invested in ETFs that track pure diversified beta indices. While ETFs remain a largely beta focused industry, launches this year are pointing towards more novel products that are creating tools that attempt to more efficiently extract alpha in a risk controlled manner. This wave of launches is testing the waters for a new dimension in the indexing and asset management industries in general.
ETF industry growth was relatively stronger outside the US and Europe. All regions demonstrated positive growth rates ranging from 5%-8%, with the exception of European ETF assets that shrunk close to 5%. Asia and other countries outside the US and Europe – especially Asia, Canada and South Africa – demonstrated healthy growth rates indicating that adoption rates are beginning to re-kindle after a more quiet 2010.
Asia saw a record number of new entrants [20] launching a collective 22 new ETFs into the region. It also saw cash flows in 2011 [USD19.9 billion] that were twice those of 2010 [USD10.8 billion]. This uptick signals increased interest through an increased number of new providers dipping their toes into the ETF market. It also tells a story of local larger providers making advances and getting more flows than US and European domiciled ETF providers over 2011. In other regions, there was large cross-listing activity by established, primarily US domiciled, providers, recognising potential in regions outside the US, Asia and Europe.
Europe was the worst performing region with total inflows over 2011 totalling USD22.1 billion, less than half of those registered in the prior year [USD45.0 billion]. The slowdown in Europe is mostly due to negative price declines which kept investors at bay. In addition, the European market was also impacted – especially in the second half of the year – by uncertainty driven by credit and Euro stability concerns in the region and also, to a smaller extent, by negative regulator comments about ETFs.
Much of Europe’s ETF market fortune in the coming year will depend on what happens outside the ETF market over 2011. The resolution, or at least softening, of the Euro Sovereign crisis, and the impact it will have on market mood will be crucial. However, other forces are beginning to shift in Europe as well. At the moment, the European market is dominated by US asset managers and European investment banks. The large European asset management houses remain largely absent from the ETF market. Changing competitive dynamics on how mutual funds are sold across the European market are creating more incentives for European asset managers to engage in the ETF industry. Increased scrutiny by regulators in Europe also signals the belief that more retail and smaller investors are beginning to embrace the ETF product.
We expect ETFs to continue growing by 15%-20%over 2012 and while much of the growth will be determined by general market mood, ETFs are at a stage where they are exhibiting signs of functioning as an independent – portfolio building – market. In the US market, fixed income ETFs over 2011 have reflected broader economic risk themes, proving that ETFs grow not only when the equity market is rising. Gold ETPs also played an important role in filling the risk off trade both in the US and Europe. A balancing of asset class sizes in the ETP industry can also help growth prospects going forward.
Some of the factors that have kept the European market relatively subdued this year, especially on the ETF front, seem to be heading for a resolution. The European Securities and Markets Authority [ESMA] is poised to publish additional guidance on ETFs in the first quarter of 2012, signalling the beginning of closing the loop on the European ETF industry’s biggest test since its creation. The uptick of cash flows in Asia and other parts of the word indicate that the ETF functionality benefits are enticing investors in those regions as well.
But the industry is at a turning point in its evolution. Growth is normalising and ETFs are about to go mainstream with retail investors in Europe. Failure to proceed with a swift resolution in the regulatory investigations could negatively impact ETF growth in 2012. Additionally, prolonged uncertainty in the equity markets, both in the US and Europe, could slow down allocations in the industry’s larger compartment, equity. Gold ETPs, a major beneficiary of the credit crisis accounting for 8.1% of the global ETP industry, could see big outflows if the outlook for the price of gold changes. Much of the investment in gold ETPs is concentrated in a handful of products in the US and Europe.
These are all factors to watch out for in the first quarter of 2012. We don’t believe they pose a vital threat to the general health of the industry; they could however generate shocks which could drag ETFs to reflect conditions prevalent in the rest of the wider – confidence stricken –market and thus push growth in the slower lane.

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