The explosive growth of exchange-traded funds is not just a U.S. phenomenon. While the U.S. is the largest market for ETFs in the world, Europe, Asia and Latin America all support fast-growing ETF industries.

In fact, in 2007, the European ETF market actually grew faster than the U.S. market, with total assets under management rising 43%. At year-end, European ETF assets totalled $128.4 billion, in 423 funds, while U.S. ETFs totalled $580.7 billion, in 601 funds.

This healthy rate of development is all the more notable for occurring in a year when the financial markets as a whole ran into the buffers: Equity markets peaked in the summer, and credit and derivatives markets were shrinking fast by year-end, a trend that has continued into 2008.

In this and future weekly features for IndexUniverse.com, I will be focussing on the European ETF industry, comparing and contrasting it with its U.S. counterpart, interviewing leading players, investigating the regulatory landscape and generally providing some regular comment on a very dynamic and still relatively underreported area of the financial markets. I would welcome readers' feedback, and in particular, suggestions for future articles-please leave comments on the Web site, or write to me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

The State Of The Market

Let's start by reminding ourselves of some of the most important characteristics of the European ETF market. Here, and elsewhere, I have included other exchange-traded products, such as exchange-traded commodities, in the overall calculation.

Top 10 European ETF Managers By Assets (Year-End-2007)*

While Barclays Global Investors is the market leader in both Europe and the U.S. with its iShares brand, the other names in the European top 10 feature only one from the equivalent U.S. list-State Street Global Advisors (which is No. 2 by assets in the U.S. ETF market, but only a bit player in Europe). The relative lack of homogeneity between product providers in the world's biggest two ETF markets is surprising at first glance. As the ETF markets mature, there will likely be more overlap on these lists. Already, a number of U.S. firms (such as PowerShares Capital Management) are aggressively moving into Europe, and certain European advisors are eyeing the U.S. market. One firm, SPA ETFs, recently launched funds in both the U.S. and Europe simultaneously.

A notable entrant to the European top ten is Deutsche Bank, whose x-trackers range was launched early in 2007, and which ended the year as the third-biggest product range by assets under management.

Asset Class Split

It is interesting to compare the European and U.S. ETF markets by asset class. In the tables below, I have divided the asset exposure into four broad categories: equities (native region); equities (overseas/international); fixed income; and commodities (including ETCs and ETNs).

European ETFs*                          

U.S. ETFs*

A couple of things stand out. First, the overall proportion of the ETF market devoted to fixed income in Europe is higher than in the U.S. This seems to reflect the historical preference for bonds in continental Europe. Second, while both markets show a strong domestic bias, the ETF equity sector is less devoted to overseas investing (if one takes Europe as a whole) than in the U.S.

There are some other interesting differences, such as the relatively smaller weight given to style/sector equity ETFs in Europe than in the U.S., which we will explore in future articles.

Who Are The Investors?

Industry estimates suggest that over half the ETFs in the U.S. are owned by retail investors, while the comparable figure is around a third in Europe, although there appears to be no hard and fast data backing these numbers up. The managed funds sector, banks, hedge funds and private wealth managers own a significant proportion of the European market, whereas in the U.S., high retail use reflects a longer tradition of indexed or passive investment and the sector's broad acceptance by fund advisors.

Across the continent, there are significant differences from country to country. For example, retail ownership is healthy in Italy (partly reflecting regulatory constraints on accessing other index-based products). In Germany, the index certificates market, a form of retail-structured product offering index exposure to different markets-sometimes with leverage and/or protection-offers direct competition to ETFs. In the U.K., retail investors' choices are still directed by independent financial advisors, who in general are reluctant to recommend investment products that do not pay commission, and who therefore tend to favour actively managed investment products with high front-end loads.

While the ETF market share of the overall mutual fund sector is now over 4% in the U.S., the comparable figure is only 1-2% in Europe. Nevertheless, and as we have seen, European ETFs are growing healthily and we can expect these figures for market share to increase. The trend towards greater private provision for pension saving across Europe can only help this trend.

Where Are They Listed?

One important thing to understand about the European ETF market is that, despite the single currency and increasing standardisation of laws at the EU level, there are still significant cultural and legal differences between the different countries, which must be taken into account by product providers. Each country typically has its own stock exchange, with its own rules and regulations.Therefore, in order to access retail markets across Europe, it has long been customary to cross-list ETFs on stock exchanges throughout the region; that is, funds will have a primary listing in one market (say, London, or Frankfurt), and then secondary listings in other countries.

So, in examining the market, we must pay attention both to primary listings and total listings. Italy, for example, has few primary listings of ETFs, but is ranked above the U.K. by total listings.

Here is a summary of European ETF listings by country and by exchange as at end-2007, ranked by number of total listings in the first table.*

As we can see, there is a healthy spread of ETF market activity across the continent, with Germany ranking top by number of listings. The recent merger between the LSE and Borsa Italiana will change the rankings in 2008, but the relatively even split of listings by exchange has meant competition in attracting new launches. This, some say, has fostered innovation in the European ETF market and helped streamline the process of launching new funds.

Setting The Scene

Starting next week, I will look further into some of the most popular European funds, talk with some of the major market participants about their views, examine product innovation in Europe and investigate the tax and regulatory framework. I'm looking forward to covering this exciting and dynamic sector for IndexUniverse.com.

Acknowledgment

I'd like to thank Debbie Fuhr and her colleagues at Morgan Stanley for their research, an invaluable source of information on the ETF market.

*Source for this and other industry data: Morgan Stanley 2007 Year-End ETF Global Industry Review