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The worldwide exchange-traded fund market has gained significant momentum since the launch of the first ETF in the United States, in 1993. The first ETF in Europe, the iShares DJ Euro Stoxx 50 (EUN2), was launched only seven years later, in April 2000. Since then, the European exchange-traded product market has grown rapidly to include 1,1031 ETFs and exchange-traded commodities, with over 3,000 separate listings, at the end of 2009. European ETP assets under management rose to $223 billion2 by the same date (see Figure 1).
In terms of average daily trading volume, Europe lags behind the U.S. considerably. European average daily turnover was $2.3 billion in 2009, compared with $45.8 billion in the U.S. (see Figure 2).
One of the major differences between the European and the U.S. ETF markets is that, in the U.S., there are only one or two ETFs tracking each given index, whereas in Europe, one index is tracked by 78 separate ETF listings, and many others have multiple listings as well.
In this article, we will examine the reasons for this fragmentation, and the effect it has on the liquidity of ETFs in Europe.
Examples Of Fragmentation
The fragmentation in Europe is caused by two factors: 1) Competition between issuers; and 2) inefficiencies in the structure of the European financial markets. Combined, these have fractured the ETF market with significant impacts on end investors.
For example, consider the Dow Jones Euro Stoxx 50 Index (“SX5E”). Widely popular, SX5E is tracked by the most liquid European index futures contract (listed on Eurex), as well as some of the largest and most liquid ETFs in Europe.
But as of December 2009, there were 78 different listings for ETFs tracking the SX5E (see Figure 3). This excludes numerous structured delta-1 notes listed on platforms like Scoach.
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