Investors missing ETF potential
13 June 2008

Written by Sophie Baker

A new EDHEC study shows that European investors are not taking advantage of the potentially beneficial features of their ETFs.

The EDHEC European ETF Survey 2008 reveals that while ETFs are now widely used and practitioners are highly satisfied with their features, the use of ETFs is largely limited to passive holdings of broad market indices and the wide range of ETFs for subcategories and styles is not used to its full potential.

Results also show that most practitioners do not benefit from the possibilities of trading options on ETFs, selling them short, or lending them out.

Since ETFs can be bought and sold like stocks, EDHEC believes they are ideally suited for dynamic risk management in portfolio construction, and the EDHEC study shows that such dynamic risk budgeting has substantial benefits.

The survey is based on a questionnaire that was addressed to industry participants in Europe from 29 January 2008 to 21 April 2008, generating responses from 111 institutions based in Europe.

Seven key results were deduced from the findings, showing that there is a dominance of broad market ETFs, ETFs are now widely used in satellite portfolios, ETFs for alternative assets are on the rise, and that ETFs still focus on equity investing.

The other findings were that advanced features of ETFs are underused, ETFs and futures are the preferred indexing instruments, and that ‘indexing’ is on the rise. EDHEC says that ETFs will benefit most from this, without harming other indexing vehicles.

Commenting on the findings, Axel Lomholt, head of ETF products at iShares, said: “EDHEC’s research shows it’s clear that ETFs have become a mainstream investment product, and supports our own findings that ETFs are being used in ever more increasingly sophisticated ways by investors.

“However, EDHEC’s findings also shows that there is still work to be done on educating the market on the full potential of ETFs, with investors yet to take advantage of the more advanced uses of ETFs – particularly in the area of securities lending, trading options, and short-selling.”

Another survey by db x-trackers, has highlighted the growth and changes in trends in the ETF commodities market, in both the US and Europe.

Commodities ETFs represent 8.98 per cent of total ETF assets under management in Europe, and turnover in commodity products represents around 12 per cent of total ETF turnover. The preferred commodities trading vehicle in Europe are exchange traded commodities (ETCs), with 84 per cent of all turnover.