While overall European ETF assets under management (AUM) have stagnated this year as a result of equity market drops, certain areas have continued to grow rapidly. Commodities, for instance, is one such area, driven by the continued bull market in that space. But the fixed-income sector has also grown sharply in terms of AUM, as showcased in the chart below.

European Fixed-Income AUM Growth

 

Two ETFs top the European fixed-income charts, in terms of both AUM and secondary market trading volume. Interestingly, both of them are short-term money market style funds-Deutsche Bank's db x-trackers Eonia Total Return Index ETF (Milan: XEON.MI), with 3.2 billion euros invested, and the Lyxor ETF Euro Cash EuroMTS Eonia (Paris: CSH.PA), with just under 2.0 billion euros invested.

The Deutsche Bank fund is domiciled in Luxembourg with listings in Germany, France and Italy. The Lyxor fund is domiciled and listed in France, with secondary listings in Germany, Italy and Spain. Both ETFs are offered at a 15 basis points annual fee.

The Eonia Euro money market rate tracked by the funds is calculated as the weighted average of all unsecured overnight lending transactions in the interbank market, compiled from a contributing panel of Eurozone banks.

Deutsche Bank also offers similar funds linked to sterling and U.S. dollar money market rates.

The number of ETF providers in the money market sector has recently increased to three, with the EasyETF launch of its own versions of Eonia and dollar (Fed funds rate) ETFs.

Interest Increasing 

So far, the euro rate trackers have attracted much more interest than the sterling or dollar versions, mainly because they were launched earlier and because of the euro's strength. The increase in competing institutional money market products in the UK for sterling has made it more difficult for the products to grow there as well. In addition, low U.S. interest rates and the weak dollar have reduced demand for dollar cash products.

According to Marco Montanari, head of Fixed Income ETF Structuring at Deutsche Bank, the success of these money market ETFs in Europe is driven by three factors. The first is their transparency-with the overnight deposit indexes accruing interest daily, investors can see clearly how much they are earning. The second factor is the ETFs' relative safety, when compared to a certificate or deposit. And finally, the ETFs are very low cost.

Up to now, said Montanari, most investors in these ETFs have come from the institutional sector and are typically banks, insurance companies and funds of funds. For Deutsche Bank, most investors have come from Germany and Italy, but also from France, Switzerland, Spain and throughout the Eurozone. Montanari added that he thinks retail interest should pick up as well, since these ETFs enable smaller investor to access money market cash rates in the same way as institutions, basically for the first time.

I am good example of this here. On a personal note, my SIPP (self-invested pension plan) in the UK, which holds ETFs, earns interest from the plan provider on any surplus cash holdings at around 1-1.5% below official rates. So this kind of fund offers an obvious way to improve on returns.

There are also some tax advantages for certain European investors when holding money market ETFs. To give two examples, Italian investors pay a 27% tax rate on deposits, but only 12.5% on funds, and so are attracted to the Eonia ETFs. In the UK, where db x-trackers offer a sterling money market ETF, its status as a fund allows an investor to allocate the full ISA (tax-sheltered) allowance of £7,200 per tax year, whereas ISAs investing in cash deposits directly are capped at £3,600 per tax year.

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